The imposition of a payroll tax

Question

Quizplus · Accepted Answer

The imposition of a payroll tax increases the cost of labor for firms, which reduces their demand for labor. This shifts the labor supply curve to the left as firms hire fewer workers at any given wage rate. As a result, employees receive a lower net wage after taxes, which reduces their purchasing power and can lead to lower economic growth. Therefore, option D is the correct choice. Options A and B are incorrect because a payroll tax increases the nominal cost of labor for firms, which reduces the net wage paid to employees. Option C is incorrect because a payroll tax shifts the labor supply curve to the left, not the labor demand curve.

The Imposition of a Payroll Tax