Home / Questions / Now suppose that the State of Washington institutes an income tax of $52 or about $1.66, f...
Now suppose that the State of Washington institutes an income tax of $5/2 or about $1.66, for each hour of work. (Now, you may be thinking that Washington doesn't have a state income tax IRL, and even if they did, it wouldn't be assessed this way—work with me here, people). a) Re-calculate the "free-market” equilibrium with the tax. To do this, set up the labor supply function and solve for wage to get W = . L, then add the 5/3 tax to the right-hand side. Turn it back around to solve for L, then compute the equilibrium as you did in Question (2). You may also find the "Multi-Series Generator" tab of the HW 2 Excel graphing tool useful in visualizing this result. b) Does the tax have any effect on labor hours hired when the minimum wage is $10 per hour? What about $15/hour? Why or why not? [HINT: a graph may be helpful, but it's not required). c) Make a policy recommendation to the State of Washington about how to maximize their tax revenue. In particular, should they work with the City of Seattle to change its minimum wage? Why?
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