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A few e-mails came in last week when I mentioned that my marginal tax rates on my next dollar of earned income were rather high. In doing so, I included nearly all of the 15.3% of the payroll tax as coming out of my wages. Was I right to do this? That is not the point of this post. Before I get to the simple point, remember that the idea that “employers pay half the tax and employees pay half the tax” only refers to the legal rules on who the funds are being deducted from at the time taxes are paid. But this information tells us nothing about who the actual burden of taxes falls upon. Without a long econ lecture, let me just remind readers that the economic burden is solely a function of who can more easily “avoid” the tax. For example, if firms can easily substitute machines for workers, or adjust labor hours or non-wage compensation and workers are not as easily able to secure other employment or otherwise make themselves more productive, workers will be hurt. The opposite is also true. Both the simple theory and a good deal of empirical evidence suggest that almost all of the burden of payroll taxes falls upon workers and not firms.

For example see here and here and here and how about this (ultimately this is an empirical question, and I will say more about it in the future):

Payroll taxes. These include employer contributions to EI and C/QPP as well as Worker’s Compensation premiums. But as a HRCD survey notes, long-run labour demand is more elastic than labour supply, so the ultimate effect of payroll taxes is to reduce wages: “labour’s share of the payroll tax burden in the long run is in the range of 87 to 100 percent.”

It would not be hard to understand why. However, this brings me to my point. I have heard the following two arguments in nearly back-to-back sentences:

  1. “Firms and workers share the burden of the payroll tax”
  2. Workers really need their jobs more than firms need those workers (this in the context of firms having the ability to exploit workers

You cannot hold both of these views. I am not arguing that either is right or wrong here, only that you cannot hold both views. If you hold the second view, that workers are at the mercy of firms, then you have to believe that virtually all of the payroll tax is “passed on” to workers. Now I do not believe that many proponents of social justice, who think they can just tack on obligation after obligation upon firms with no consequence actually appreciate this. If they want to believe that firms exploit workers, and they are certainly free to imagine this, then it has to be the case that any additional costs put upon firms end up being felt by those very workers whom we claim to be trying to help. Adding health insurance obligations would only serve to reduce wages. Raising unemployment insurance premiums would only serve to reduce wages. Mandating vacation time would only serve to reduce wages.

Now despite some of the evidence on payroll tax indicence, there are surely cases where there are larger burdens borne by firms. One reason to believe that firms feel some of the cost is that they would not be so upset any time mandates and cost increases are being tossed at them by Congress. If they could truly exploit their workers and pass on these costs, and still remain profitable, then they really wouldn’t care about these mandates. But they do. My point again is that if you think that “firms can eat it” then you will have a really hard time making a consistent argument that firms are also in the business of exploiting their workers. I think you can conjure up an argument, but it would probably look like the one that Marx tried to conjure up in Capital and that Bohm-Bawerk pretty well annihilated a few years after it was written.

2 Responses to “On Sharing the Burden”

  1. Harry says:

    Excellent points, Wintercow.

    Those points are easily understood if you are in business for yourself, where taxes and other burdens fall immediately on you, and then on the people you have to pay.

    In my experience, employees often know their total cost, and appreciate the total package that comes to them as a result of our Byzantine tax code, especially if they make the tax deposits to the bank and understand the other problems with running a free enterprise.

    But as for Wintercow’s tax burden, I sympathasize, because he vastly understated it. Beyond New York State’s heavy taxes are Wintercow’s real estate taxes and the sales taxes he pays with after-tax dollars, and excessive fuel taxes he pays to fill the tank in his Harley Electra Glide.

  2. Rod says:

    Yes, and don’t forget the corporate taxes and business taxes concealed in the price of practically everything, as well as the administrative costs of complying with all these taxes.

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