Wednesday, March 09, 2005

Who's Doing The Payin' Around Here?

Walter Williams points out an interesting but almost universally ignored economic fact in this article.

There's more to the deceit and dishonesty about Social Security. Congress tells us that one half (6.2 percent) of the Social Security tax is paid by employees and the other half paid by employers. The truth of the matter is that all of it (12.4 percent) is paid by employees. You say, "What! It says on my pay stub that I pay 6.2 percent." Let's look at it.

Suppose you hire me at $6 an hour. From that $6 an hour, you must deduct 35 cents in Social Security tax and add 35 cents of so-called employer contribution. Here's the big question: What is your hourly cost to hire me? If you said $6.35, go to the head of the class. Now comes the bigger question. If it cost you $6.35 an hour to hire me, what must be the minimum value of my contribution to your company's output? If you said $6.35, again, go to the head of the class. If you said that the value of my hourly output had to be $6, our agreed-upon wage, you'd be losing money and soon would be out of business because my hourly cost would exceed my hourly output.

The fiction that employees and employers each pay half of Social Security taxes has survived since 1936 for two reasons. First, it was meant to disguise the true tax imposed, and second, it promises something for nothing -- a free lunch. And, when it comes to the promise of a free lunch, employers paying half, gullibility reigns supreme.

To state a primary result of such hidden taxes a little more explicitly: more unemployment. In Williams' example, with the hidden tax, the person whose productivity is $6/hr is out of luck. No job for him at the company that needs his productivity to clear $6.35 in order to break even. Without the hidden "the company pays" tax, he could be hired. With it, he can't. Companies don't pay taxes. People do.

1 comment:

Matt said...

Ah yes, the old (and very true) TNSTAAFL theorum.