Tax Wedge Law and Legal Definition

Tax wedge is the difference between workers’ pay that they take home and what it costs to employ these workers. For example, a worker gets paid $600 per week, but since the governments take a variety of income and payroll taxes out of the worker’s wages, s/he receives a net of only $470 per week. This difference of $130 per week is the tax wedge. As the wedge increases, a worker has a tendency to offer less labor.