The growing “tax wedge” between how much employers pay to keep their workers on the payroll and how much those workers receive in take‐home pay is, in effect, crowding out take‐home pay. That’s why earnings have been stagnant.
Here are the numbers for New York from my recent Cato Institute study on the ever‐expanding tax wedge:
* A full‐time average manufacturing wage worker earns a gross income of $27,200.
* When workers’ compensation premiums, unemployment insurance taxes, and the employer share of the FICA payroll tax are included, that worker costs his employer nearly $31,600, fifth highest in the nation. (Of course that does not include the cost of fringe benefits and tax and regulatory compliance.)
* After income and payroll taxes are withheld, the worker receives only about $22,500 in take‐home pay.
* The tax wedge for an average manufacturing wage worker is almost $9,100, 11th highest in the nation. (That does not include the host of additional taxes — property taxes, sales taxes, gas taxes, cigarette taxes and so on — that workers must pay out of their remaining take‐home pay.)
* The tax wedge consumes 29 percent of the amount employers pay to keep that worker on the payroll, 12th highest in the nation.
* Nearly half of the tax wedge is hidden from the worker, that is, it comes from taxes paid directly by the employer on the worker’s behalf.
So, if you are an average manufacturing wage worker in New York, more than a quarter of every dollar that your employer must pay to keep you on the payroll goes to government, rather than to you in take‐home pay. If you’re earning a salary of $60,000, the tax wedge rises to 37 cents on the dollar. Nearly half of that amount doesn’t appear anywhere on your pay stub.
One way to address the problem of hidden taxation is to eliminate income and payroll taxes. Replacing those taxes with a national sales tax, paid directly by consumers every time they make a purchase, would make the burden of taxation much more visible.
Short of such fundamental tax reform, repealing the deceptive practice of tax withholding and encouraging employers to adopt the Right to Know Payroll Form would also increase the visibility of our tax burden. The Right to Know Payroll Form was first introduced by the Mackinac Center for Public Policy in Michigan. It itemizes on workers’ pay stubs each and every one of the costs imposed by government tax and regulatory policies.
Until we remove the veil of secrecy and bring hidden taxes out into the open, government will continue to take a larger and larger bite out of your take‐home pay.