Self-employed workers in the United States must pay Social Security
Self-employed workers in the United States must pay Social Security taxes equal to 10.4% of any income up to $110,100 in 2012. This income level of $110,100 is known as the “cap.” Income in excess of the cap is not subject to Social Security tax, so self-employed workers with incomes exceeding $110,100 pay $110,100 X 0.104 = $11,450. Now consider two proposals designed to increase Social Security tax revenue. Proposal A increases the cap to $137,625 so that Social Security taxes equal 10.4% of income up to $137,625. Proposal B increases the Social Security tax rate to 13%, but leaves the cap unchanged at $110,100. For people with income that always exceeds the cap, the amount of Social Security tax is the same under Proposal A ($137,625 X 0.104 = $14,313) as under Proposal B ($110,100 X 0.13 = $14,313). There are no planned changes in future Social Security benefits anticipated by current workers.
a. Sally is self-employed and earns $150,000 per year. What are the effects of Proposal A and Proposal B on Sally’s labor supply? Under which proposal would she supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.
b. Fred is self-employed and earns $50,000 per year. What are the effects of Proposal A and Proposal B on Fred’s labor supply? Under which proposal would he supply a greater amount of labor? Explain your answers using the concepts of income effect and substitution effect.
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Posted 04 Jun 2017 08:06 AM
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