Who Pays Payroll Taxes

It is clear that income taxes are borne by employees, as the tax is withheld from their paychecks and the employees file annual returns. However, many managers are unaware of the burden payroll taxes place on employees.

Social Security taxes are an example. Although half of this tax appears to be charged to employers, in reality the worker bears the entire cost of such

153 State of Michigan Bureau of Workers' and Unemployment Compensation Web site at: http://www.michigan.gov/bwuc., Table "Average Contribution Rate Based on Total and Taxable Payrolls, 1936-2000."

154 The same Act increased maximum benefits from $300 per week to $362. See fact sheets 97 and 98, available on the State of Michigan Bureau of Workers' and Unemployment Compensation Web site at: http://www.michigan.gov/bwuc.

155 Because the tax rate is set by calculating the tax revenue necessary to pay benefits, increasing the benefits has the effect of increasing the rate. However, the rate is adjusted over time, so the full effect of PA 192 of 2002 will not be felt for several years.

payroll taxes. When a worker is hired, the employer makes an economic decision whether or not the product the worker provides—his or her output of goods and services—is worth more than the cost of employing the worker. The cost of employing that worker includes his gross wages and any payroll taxes. If this total cost is more than the output of the worker, the company will lay off the employee or eventually go out of business.

From economic reasoning alone, it is clear that the worker must bear the burden of producing enough goods and services to pay for his or her wages and all payroll taxes. Past studies that have attempted to disentangle statistically the share of burden that falls on employees have commonly found at least 70% of the payroll tax burden is borne by employees.156 However, even this understates the degree to which employees actually bear the burden.157 There is a broad consensus among economists today that employees (not employers) shoulder the burden of payroll taxes.1 8

0 0

Post a comment