We often define taxes as our money (or time) used for government purposes. This is not a dictionary or legal definition; that definition would be “money paid to the government for public purposes.” But does it really matter whether or not it is paid to the government? If the government requires us to spend money in a certain way, they can say that no tax was raised and be legally correct — but the effect on my pocketbook is the same, whether I write the check directly to the government, or pay someone else to satisfy a government mandate. I still cannot use that money as I wish.
At least in the situation above, the taxpayer knows the amount, although most do not stop and add up all the amounts paid to the government or to meet a government requirement. There are also “hidden” taxes on employees. The gross compensation shown on an employee’s paycheck is only part of what it costs the employer to employ a worker. Any taxes and mandates that are triggered by this employment relationship are also a cost to the employer, and wise employers know the significant costs related to each employee. From the standpoint of the employer, the total of those costs is what he or she is paying for the work done by that employee. It does not matter to the employer to whom the amounts are paid, so the gross pay is what the employee is really worth, less the amounts paid to others. Therefore, any tax or mandate supposedly imposed on the employer is really a tax, ultimately borne by the employee.
Consider an example. The health care reform bill will require certain employers to pay for health insurance for their employees. Let’s see how employers will react to that mandate. Assume that an employer is willing to pay $30,000 per year for a worker. There are four expenses that apply to typical workers:
- Federal unemployment tax at .8% of the first $7,000 of compensation, so we will use $56.
- State unemployment tax varies from employer to employer based on experience rating and from state to state. Let’s use $250 as a reasonable amount for this expense.
- Social Security and Medicare taxes total 7.65 percent of cash compensation.
- Workers comp insurance costs vary widely depending on state law, type of work, and employer experience. For this example, let’s use 2% of compensation as the rate. This is much higher than would be expected for office jobs, but very low compared to the more dangerous jobs.
There would probably be many other costs an employer would consider, but this is this is enough for illustrative purposes. This employer would then be able to offer this employee about $27,000 per year (gross pay), or 90% of what the employer would have been willing to pay in the absence of these current taxes and mandates.
Now let’s consider the effect of the health care reform bill, again from the employer’s viewpoint. If, in this example, the employee has a family, it would be good to find a policy with premiums of $10,000 per year. Assume the employer pays half. How will that change the situation in our example? The employer will now pay the worker about $22,500 gross pay, and the worker will also have $5,000 coming out of his check to pay his share of the premium. (The reduction in the gross pay is not the full $5,000 that the employer pays because the social security and workers’ comp expenses go down as the gross pay is reduced.)
Actually, in this situation, it would be cheaper for the employer to just pay the $2,000 penalty for not having insurance on this worker. That would leave a bit over $25,000 available for this employee’s gross pay.
Let’s take this one more step: Say the employer in this example has 50 employees on the payroll. According to the healthcare reform bill, if he or she had only 49 employees, the mandate or penalty would not apply. Even taking the cheaper option (paying the penalty), the 50th employee cost the employer $100,000! (The $100,000 comes from the $2,000 penalty per employee times 50 employees, but the cost is the cost of having the 50th employee because the penalty would not apply if the there were only 49 employees.) Our example employee just lost his job, costing him a total of about $27,000 per year compared to the situation before this law went into effect.
The desire to stop hiding the cost of government is one reason that the ComingTogether Plan proposes that income taxes be imposed only where income is generated and is visible to the receiver of the income, whether via a deduction from a payment or on a tax return.