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Friday, August 10, 2007

Microeconomics quiz of the week II

Also from ProfessorJournal.com:
Businesses don't pay taxes. People pay taxes. And the evidence suggests the corporate tax hits wage earners hard. In this opinion piece, Glenn Hubbard, Dean, Columbia Business School, offers that the most interesting issues of the discussion about whether to increase corporate taxes are "whether corporate taxes are an effective way to raise revenue for the government. And, importantly, who really pays the tax." As Prof. Hubbard puts it, the tax incidence question is basic Econ 101, and thus entirely appropriate for principles and intermediate economics courses. "The admonition that people pay taxes -- in this case, suppliers of capital through lower returns, workers through lower wages, and/or consumers through higher prices -- remains true even when the tax is aimed at capital." The opinion piece nicely outlines how in an open economy, an increase in corporate taxes leads to a decrease in wages. The piece then offers summaries of empirical evidence of this phenomenon.

QUESTIONS:
1.) In an economy open to international trade and capital flows, how does an increase in corporate tax rates lead to a reduction in wages?

2.) What are the estimates of the effect of an increase in corporate tax rates on manufacturing wage rates?

3.) Prof. Hubbard states, "In fact, workers collectively would be better off if they voted for higher taxes on labor with corresponding cuts in corporate tax rates." Explain how this result is possible.

4.) Why does the competition for investment drive down corporate tax rates? In Europe, how are corporate tax cuts being financed?


WSJ piece here (sub req'd)

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