U.S. CitiesCity-Data Forum Index
Happy Easter!
Go Back   City-Data Forum > General Forums > Economics
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
 
Old 12-19-2013, 09:30 AM
 
Location: Old Bellevue, WA
18,794 posts, read 13,589,390 times
Reputation: 7921

Advertisements

As most probably know social security tax is purportedly split between employer and employee. Both pay 6.2%, for a total of 12.4%. However, I remember learning (many years ago) in Econ 101 that economists consider this a legal fiction, a cooking of the books, and that in effect the entire 12.4% really comes out of employee pockets.

I also remember once seeing an AARP official on CSPAN admit this when a caller called in to ask about it. The AARP guy had an odd look, like he was trying not to pass gas. Dirty little secrets....

The reasoning is that if the 6.2% employer-paid tax were suddenly dropped, the employer would have to fork over a 6.2% pay increase. This is because the cost of keeping you, the employee, on staff has now dropped, but the employee's market value is the same. So company Y down the road notices that original company X is getting a surplus profit out of you of 6.2%, and they offer to cut that in half by giving you a 3.1% raise. And company Z notices that company Y is still getting a bargain, so they offer a 1.55% raise. And so on, until you are finally back to getting the full 6.2% on YOUR paycheck.

I have googled around for a succinct explanation of this that will not cause peoples' eyes to glaze over (as I'm sure the paragraph above did for most people), but come up empty. Can anyone do better, or refer me to a link? Or even perhaps just an assertion, not an explanation, by someone regarded as authoritative, especially by left-oriented posters? Like say a Paul Krugman, or a Felix Rohatyn...somebody like that.
Reply With Quote Quick reply to this message

 
Old 12-19-2013, 10:37 AM
 
Location: North Idaho
21,008 posts, read 25,794,422 times
Reputation: 39409
Yes, the employers share increases the cost of maintaining an employee. No, if SS tax goes away, the employee will most likely not get a raise.

Rule of thumb, OP, an employee costs an employer about twice the actual salary amount.

And adding: yeah, like the federal government will ever give up a source of tax revenue. Dream on.

The feds will only discover a new tax to impose upon employers, and no, the employee won't get a pay cut, but the employer will stop hiring as many people and might lay people off.
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 10:53 AM
 
Location: North Idaho
21,008 posts, read 25,794,422 times
Reputation: 39409
Adding this, OP: say the feds really did give a sharp reduction in taxes that a business has to pay. The business is not going to look around and poach employees by offering a higher salary because virtually no employee is irreplaceable or so talented that businesses must have him.

What is much more likely to happen is that the business will drop the price of their product to try to undercut the competition and to increase their market share. It would not be a big price drop because 7% of the employee's salary is an extremely small amount of the cost of manufacturing a product.

If it is a giant mega-corporation, what would happen is that they would issue a higher than expected dividend, thus increasing the value of their stock for the shareholders.
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 11:17 AM
 
Location: Old Bellevue, WA
18,794 posts, read 13,589,390 times
Reputation: 7921
Well, this is the conventional wisdom among most economists, based on supply-demand analysis. Tax incidence is one of the more well-developed areas of economics with relatively good consensus.

I just happened to run into this link giving the standard analysis, if you're interested.
bp_casefair_econf_7e|Public Finance: The Economics of Taxatio|Tax Incidence: Who Pays?|The Incidence of Payroll Taxes


Rather than a debate, I'm more interested in whether someone has a concise and clear way of expressing this. I don't mean to tell people what they can and can't post, of course.
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 11:23 AM
 
1,726 posts, read 1,211,626 times
Reputation: 773
Quote:
Originally Posted by wutitiz View Post
As most probably know social security tax is purportedly split between employer and employee. Both pay 6.2%, for a total of 12.4%. However, I remember learning (many years ago) in Econ 101 that economists consider this a legal fiction, a cooking of the books, and that in effect the entire 12.4% really comes out of employee pockets.
It is not cooking the books, but basic economics tells us that tax burdens are irrelevant of legislature intent and depends on relative elasticities of supply and demand. For employees to bear the full, the supply of labor would have to be perfectly inelastic, which is a dubious claim. Nonetheless, it does appear that that employees bear the burden of the payroll tax.

In spite of its policy relevance, academics and policymakers cannot agree on who bears the brunt of a tax on labour. This column uses meta-regression techniques to argue that economic institutions, the tax wedge definition, and the time horizon are crucial in determining who actually pays. Results based on 52 empirical papers suggest that in the long run, workers bear between two thirds of the tax burden in Continental and Anglo-Saxon economies, and nearly 90% in Nordic ones.
Who really pays social security contributions and labour taxes? | vox

Remember, the payroll tax is no different than any other tax. The tax burden will fall on whoever has the more relatively inelastic curve (or whoever is least responsive to a price change).

For example, we could tax cigarette companies per a pack of cigarettes, but who pays the tax? Cigarette smokers since they have the relatively inelastic demand curve or least responsive to a price change in a pack of cigarettes.

Who pays property taxes? Landlord or renters? This depends on the rental market. Places with a lot of rental opening and little demand, the tax will primarily fall on the landlord, while landlord will have an easier time passing on property taxes to tenants.

What about the EITC? That works the same way. While some people think that it fully subsidizes workers, this is not true about $0.27 out of every dollar is captured by employers.
http://politiquessociales.net/IMG/pdf/184rothstein.pdf
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 12:39 PM
 
Location: East of Seattle since 1992, originally from SF Bay Area
28,416 posts, read 50,646,420 times
Reputation: 28674
When I had a business I paid the entire amount of the SS tax for my employees. Of course, I only had 4 at most, and only paid them $10-12/hour at the time so it wasn't that big a deal. For employers of 1,000 with salaries in 6 figures it's a big chunk of their operating expense.
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 01:50 PM
 
1,726 posts, read 1,211,626 times
Reputation: 773
Quote:
Originally Posted by Hemlock140 View Post
When I had a business I paid the entire amount of the SS tax for my employees.
I am not sure why you would pay the entire 12.4% SS tax rather than just the 6.2% that the employer is legally responsible for.

Assume that you legally paid the 6.2%, that does not mean you necessarily paid that full amount. Barring any personal anecdote evidence, that is not how tax incidence work. Many times, employers pass on a fraction of their legally responsible share of the payroll tax onto the employee through lower wages. In fact, that is what the literature supports - employees bear the burden of the payroll tax through lower wages.
http://www.americanbenefitscouncil.o...its_1pager.pdf
Worthwhile Canadian Initiative: The economics of tax incidence: paying the tax is not the same as bearing the burden
Reply With Quote Quick reply to this message
 
Old 12-19-2013, 08:40 PM
 
48,519 posts, read 81,063,674 times
Reputation: 17978
as much as you salary comes out iof their paockets its correct. But itand other benefits are all figure as cost of your labor. the higher the skill themroe value you are and the higher pay and all benefits are called total compensation. Last year average health insurance contribution by employers was a little over 13K per employee. They pay it has compensation total.Some pay more to provide more because its competitive to attract those employees like everything else.Some i time go bankrupt by that if it can't be reduced. when profits go down.
Reply With Quote Quick reply to this message
 
Old 12-29-2013, 08:13 AM
 
349 posts, read 413,966 times
Reputation: 467
As an employer I can tell you I look at the total cost of an employee when I look at hiring them. Their salary is just part of that, benefits and payroll taxes like my half of their social security and medicare tax.

Eliminating the employer portion of SS (FICA) and Medicare is a complicated issue with a lot of moving parts. It would not necessarily mean an instant 7.65% pay increase to employees but it would make it easier for them to get raises and does affect the consideration of whether to hire them and how much to pay initially. It boils down to how much can they produce versus how much they cost.

Quote:
Originally Posted by Hemlock140 View Post
When I had a business I paid the entire amount of the SS tax for my employees. Of course, I only had 4 at most, and only paid them $10-12/hour at the time so it wasn't that big a deal. For employers of 1,000 with salaries in 6 figures it's a big chunk of their operating expense.
Employees over the ~$117,000 Social Security wage cap are cheaper because the employer doesn't pay social security (6.2%) on their wages. Not to mention they are highly skilled and self-motivated if they are at that level so you can do more with fewer people.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics
Follow City-Data.com founder on our Forum or

All times are GMT -6.

© 2005-2018, Advameg, Inc.

City-Data.com - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 - Top