Governments usually require taxes to meet expenses such as healthcare, security, and other public requirements. To raise the revenue, the government imposes taxes on goods and services as well as on the wages and salaries that employers pay and employees earn. In essence, payroll tax, such as the Federal Insurance Contributions Act (FICA), is a form of tax imposed on the wages that employees receive from a given firm. The tax appears as a deduction from an employee’s gross salary or wages. To minimize the effects of the tax on the employees, the government can at times impose laws that compel the employers to pay half of the tax. As a result, the employers pay half of the tax, and the employees experience minimal deductions from their payrolls, which represent half of the total payroll tax. Presently, the payroll tax in the United States is 7.65% for the workers and employers. It is within this context that the study explains the bearers of the economic burden of the payrolls and analyzes the effect of the economic burden shift that can result from a shift in unemployment.
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The bearers of the economic burden resulting from payroll tax are both the firms and the workers. Notably, payroll tax aims to raise government revenues by deducting the amount of money that employees receive from firms. The implication of the deduction is increased wages and salaries by respective firms to minimize the effect of deductions on the employee’s net pay (Rubin, 2007). Consequently, the employees earn little pay as opposed to the actual gross salary or wage. When employees receive little pay and employers pay high salaries and wages due to payroll taxes, the implication is reluctance from employers to hire new employees and reduce the unemployment rate. As such, several students or individuals, who would opt for part-time or temporary jobs, demonstrate low demand. Since the workers and firms are subject to payroll taxes, reduced employment leads to minimal taxes, and thus, companies and workers end up sharing the economic burden of the payroll tax.
The tax incidence approach explains the distribution of tax among individuals, who dictate the economy. Therefore, since firms and workers are subject to payroll taxes, they dictate the economy. According to Hyman (2013), when an employee net pay drops because of the payroll tax, the demand for labor decreases. On the other hand, since payroll tax compels firms to increase wages or salaries that they pay to their workers, they become reluctant to hire additional workers. This reluctance is evident in goods and services, which are subject to taxes and price controls. Taxes, which tend to increase the price of a product, initiates reduced demand from buyers, whereas taxes or regulations that compel sellers to reduce the price of products create high demand from potential buyers. In the context of workers and firms, workers can represent goods whereas firms represent buyers, and the wages or salaries can represent the price. In the aspect of the economic principles, a price increase leads to decreased demand for the product and minimal sales, whereas a reduction in price occasions an increase in demand.
Fundamentally, the shift in the economic burden when the rate of unemployment changes from 9% to 5% is minimal since the government imposes taxes on individual payrolls. Boeri and Ours (2008) assert that when the unemployment rate reduces, revenues that the government earns increase. Increased revenues transpire because of the increased number of individuals working in various firms. These individuals pay their taxes, and in turn, boost revenues that a particular government receives. Conversely, the economic burden does not demonstrate a pronounced change. The minimal change in economic burden is because salaries and wages paid by a firm increase, while the number of workers who remit taxes rises. It is imperative to understand that regardless of the increased rates of employment, which can shift unemployment rates from 9% to 5%, wages or salaries paid by firms and earned by employees would not display a major change in the distribution of the economic burden.
Evidently, taxation of payroll taxes on firms, workers or its division between firms and workers cannot create a substantial impact on the economic burden. In relation to the economic principles, when the price of a commodity increases due to taxation, its demand goes down. Therefore, by imposing payroll tax exclusively on firms, the government subjects them to a lot of pressure, which can result in reduced wages and salaries. Moreover, the firms become reluctant to hire new employees as the tax affects their willingness to hire. Goerke (2002) explains that high taxes imposed on firms lead to high rates of unemployment and low wages or salaries especially for those employees, who work in the technical departments. Reduced wages and salaries occasion as the firms attempt to pay the additional taxes imposed on them. When salaries reduce, demand for labor decreases because several employees may not like to work and receive low wages or salaries. As such, the labor market experiences scarcity in the quantity of labor required by firms.
On the other hand, when the government shifts the tax exclusively on the workers, wages and salaries reduce. The reduction of wages or salaries occurs due to the reduced taxes deducted from workers’ gross earnings. As a result, a number of workers would opt out of the labor market and look for alternative ways of raising income. When workers exit the labor market, a scarcity of labor develops, and firms fail to get sufficient workforce required in their respective departments. Consequently, a division of payroll tax between firms and employees means that the amount of tax paid by the firms and the workers is half. The employee’s net pay is subject to deductions, which represent half of the total amount required by the government (Mankiw, 2015). Furthermore, firms pay half of the payroll tax, a factor that makes them and the workers share the burden. Apparently, the challenges presented by taxation methods are similar, and as such, it is evident that exclusive taxation or division of taxes between firms and workers does not have a pronounced differential impact on the economic burden.
Payroll tax helps the government raise revenues that are essential for its growth and development. The taxes are deductions that the government deducts from the gross pay of employees working in a given firm. In most cases, the government dictates firms and workers share the total amount of payroll tax. As a result, firms and workers pay half of the total payroll tax required by the state. In relation to the principles of economics, the changes occasioned by different methods of taxation are minimal on the economic burden. The minimal changes in taxation, whether on firms, workers, or division between firms and workers, leads to a shift in demand and supply of labor and employment rate.
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Goerke, L. (2002). Taxes and Unemployment: Collective Bargaining and Efficiency Wage Models. Boston, MA: Springer.
Hyman, D. (2013). Public Finance: A Contemporary Application of Theory to Policy. New York: Cengage Learning.
Mankiw, N. (2015). Principles of Microeconomics, 7th Edition. New York: Harvard University.
Rubin, M. (2007). Beyond Paycheck to Paycheck: A Conversation about Income, Wealth, and the Steps in Between. Portsmouth: Wachtel & Martin.