Suppose the government of Washington is considering the addition of a new tax on firms. You have been called in to provide expert analysis on how such a tax would affect employment of labor. There are 3 proposals the government is considering:
1. A tax on every hour an employee works (e.g., “X” cents per hour).
2. A tax on some percentage of the value of the firm’s buildings, land, and machinery (e.g., “Y” percent of the total property value).
3. A tax on every unit of output a firm produces (e.g., “Z” cents per unit of output).
While all the plans have the potential to reduce employment opportunities, which plan would probably have the most favorable impact on employment of labor? Briefly explain your reasoning.
HINT: Compare the plans in terms of their scale and substitution effects.