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If you have ever received a paycheck you probably noticed that taxes were deducted from the amount you earned. One ot these taxes is called FICA an acronym for the Federal   Insurance Contribution Act. The federal government uses the revenue from the FICA tax pay for Social Security and Medicare the income support and healthcare programs for the elderly. FICA is an example of a payroll tax which is a tax on the wages that firms pay their workers. In 2005 the total FICA tax for the typical worker was of earnings. Who do you think bears the burden of this payroll tax firms or workers. When Congress passed this legislation it tried to mandate a division of the tax burden. According to the law half of the tax is paid by firms and half is paid by workers. That is half of the tax is paid out of firms revenues and half is deducted from workers paychecks. The amount that shows up as a deduction on your pay stup is the worker contribution. Our analysis of tax incidenc...

We first consider a tax levied on buyers of a good. Suppose for instance that our local government passes a law requiring buyers of ice-cream cones to send 0.50 to the government for each ice-cream cone they buy. How does this law affect the buyers and sellers of ice cream? To answer this question we can follow the for analyzing supply and demand. We decide whether the law affects the supply curve or demand curve. We decide which way the curve shifts. We examine how the shift affects the equilibrium. The initial impact of the tax is on the demand for ice cream. The supply curve is not affected because for any given price of ice cream sellers have the have the same incentive to provide ice cream to the market. By contrast buyers now have to pay a tax to the government ( as well as the price to the sellers) whenever they buy ice cream. Thus the tax shifts the demand curve for ice cream. We next determine the direction of the shift. Because the tax on buyers make...

One of the Ten Principles of Economics discussed in is that markets are usually a good way to organize economic. This principle explains why economists usually oppose price ceilings and price floors. To economists prices are not the outcome of some haphazard process. Prices they contend are the result of the millions of business and consumer decisions that lie behind the the supply and demand curves. Prices have the crucial of balancing supply and demand and thereby coordinating economic activity. When policymakers set prices by legal decree they obscure the signals that normally guide the allocation of society’s resources.   Another one of the Ten Principles of Economics is that government can sometimes improve market outcomes. Indeed policymakers are led to control prices because they view the market’s outcome as unfair. Price controls are often aimed at helping the poor. For instance rent-control laws try to make housing affordable for everyone and minimum-wage ...

An important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally adequate standard of living. In 2005 the minimum wage according to federal law was 5.15 per hour and some state laws imposed higher minimum wages. To example the effects of a minimum wage we must consider the market for labor. The labor market which like all markets is subject to the forces of supply and demand. Workers determine the supply of labor and firms determine the demand. If the government dosen’t intervene the wage normally adjusts to balance labor supply and labor demand. The labor market with a minimum wage. If the minimum wage is above the equilibrium level as it is here   the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus the minimum wage raises ...

It was one of many price controls brought in during the grim panicky period between the attack on peari Harbor in 1941 and America’s move to a full wartime economy in 1943. The housing market was seen as another thing that needed to be rationed or at least regulated alongside rubber petrol coffee and shoes. By 1947 all these controls were phased out except property-price   regulations. Most cities have since scrapped these market distortions the capital of capitalism has not. Only one-third of New York City’s 2 million rental apartments are free of some kind of price restraint. A city board sets annual increases and administers an ever more complicated system. In some buildings people live in similar apartments but pay wildly different levels of rent. In others lone grandmothers sit in huge apartments aware that moving would mean paying more for a smaller place elsewhere. The oldest controls cover pre-1947 buildings (including any number of lovely houses on t...