• An estimate of the efficiency-loss ratio of taxes on labor income is 15 percent. The...
• An estimate of the efficiency-loss ratio of taxes on labor income is 15 percent. The efficiency-loss ratio of taxes on capital income is estimated to be 45 percent. What is the main reason behind this difference?
Homework Answers
Efficiency loss ratio of taxes refers to the deadweight loss generated per dollar revenue raised from imposing taxes.
In the given case, efficiency loss ratio of taxes on capital income is more than the taxes on labor income. This means use of capital income is more inelastic in nature as compared to labor income.
Capital income is income generated by an asset over a period of time while labor income is income generated from providing labor services.
Since capital income is more heavily taxed along with their inelastic nature, they generated more deadweight loss and thus efficiency loss.
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• An estimate of the efficiency-loss ratio of taxes on labor
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