Q. In a competitive market, a tax on wage income falls wholly on labour if:
Answers
Both tax credits and tax deductions lower the amount of income tax you pay.
• Credits reduce your bottom-line tax bill dollar for dollar.
• Deductions reduce the amount of income used to calculate your tax burden.
Answer:
Elastic or Perfectly Elastic is the correct answer.
Explanation:
In a competitive market, a tax on wage income would fall entirely on labour if the demand for labour is completely elastic or perfectly elastic. This means that employers are highly responsive to changes in wages and would immediately reduce the quantity of labour they demand in response to an increase in wages.
In this situation, the employer cannot pass on the burden of the tax to consumers in the form of higher prices because the demand for the product is also elastic, and an increase in prices would lead to a decrease in demand for the product.
In other words, if the tax is imposed on labour, the employer cannot pass on the burden of the tax to consumers because they will simply buy less of the product, which will reduce the employer's profits. As a result, the tax burden falls entirely on labour in the form of lower wages.
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