Suppose a country's government is concerned about growing inequality of incomes and wants to undertake a program that will increase the total earnings of the unskilled. It is considering two alternative changes to its current payroll tax, which is levied on employers as a percentage of the first $117,000 of employee earnings:

a) Extending employer payroll taxes to all earnings over $117,000 per year and increasing the cost of capital by eliminating certain tax deductions related to plant and equipment.

b) Reducing to zero employer payroll taxes on the first $50,000 of earnings but taxing employers on all employee earnings between $50,000 and $117,000 (there would be no taxes on earnings above $117,000). Analyze proposal (a) and proposal (b) separately (one, but not both, will be adopted). Which is more likely to accomplish the aim of increasing the earnings of the unskilled? Why?