Obama, Bush and the cost of hiring someone

Earlier this week, The Wall Street Journal ran an op-ed by the president of Bogen Communications, a small business in New Jersey, titled simply “Why I’m Not Hiring.” In it, he describes his company’s median worker in terms of income — and why it costs so much to employ her relative to the pay she takes home (subscription required):

She makes $59,000 a year — on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

Before that money hits her bank, it is reduced by the $2,376 she pays as her share of the medical and dental insurance that my company provides. And then the government takes its due. She pays $126 for state unemployment insurance, $149 for disability insurance and $856 for Medicare. That’s the small stuff. New Jersey takes $1,893 in income taxes. The federal government gets $3,661 for Social Security and another $6,250 for income tax withholding. The roughly $13,000 taken from her by various government entities means that some 22% of her gross pay goes to Washington or Trenton. She’s lucky she doesn’t live in New York City, where the toll would be even higher.

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest — $9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers’ comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally’s Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

Economists have a name for this difference between the cost of employment and the employee’s take-home pay and benefits: the tax wedge. The $74,000 it costs Bogen to employ “Sally” is not the prevailing market wage for her job; that would be closer to the $56,000 she takes home in pay and benefits. The remaining $18,000 is the tax wedge that government drives into the labor market and, generally speaking, the higher the tax wedge, the lower employment will be.

There are obvious implications for employment in all the Obama-Pelosi-Reid policies that point to higher taxes — as the Bogen president put it in his op-ed:

As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

But the op-ed also got me thinking in a different direction: How did the tax wedge change during the last decade?

A steady chorus tells us that the Bush tax cuts of 2001 and 2003 were primarily for the benefit of “the rich.” That ignores the fact that rates fell across all income-tax brackets and that the share of all federal income taxes paid by “the rich” rose. But it also ignores what happened to the tax wedge.

The Organization for Economic Cooperation and Development, a kind of club for industrialized countries based in Paris, compiles tax-wedge information annually. You can see a graph for its data from 2000 to 2009 here which shows comparisons not only across time and countries, but for different types of taxpayers: single mothers, two-earner families with no kids, etc.

The OECD notes that tax wedges shrunk in 2009 for countries like the U.S. in large part because wages fell due to the financial and economic crisis. So, to make sure I’ve not included any effects from the recession, I’ve compared the U.S. tax wedge from 2000 to 2007.

The biggest change, by far, was for a single parent of two kids earning two-thirds of the average wage. The tax wedge for that person fell by nearly 40 percent to just 5.8 percent. The next biggest change was for a one-income married couple with two kids earning the average wage; their tax wedge fell by about one-sixth to 17.4 percent.

On down the line it went, with the degree of change generally decreasing as a household’s size fell and its income rose.

And, uniformly, the biggest tax-wedge changes came in the 2003 tax year — that is, when the Bush tax cuts finally took full effect. That’s no doubt part of the reason why, from June 2003 (the first full month after the tax cuts were signed into law) through the end of 2007, the U.S. created 8.1 million net new jobs.

Just something to remember the next time you hear people talking about those darned “tax cuts for the rich.”

151 comments Add your comment

Would Kyle compromise?

August 13th, 2010
12:48 pm

If the main rationale being put forth for continuing the tax cuts is that the business owners will hire more people, why not compromise and offer a tax cut specifically for people who are willing to add workers to their payroll?

It might not be everything the Republicans want, but how could the Democrats oppose a tax cut that directly leads to job creation?

HDB`

August 13th, 2010
12:50 pm

If such occurred….(and I do have my doubts)…..then why was the income differential greater during the Bush years?? The incomes of blacks fell and their poverty rates rose 7.9 per cent, compared with 5.1 per cent for whites. The Bush years were a stark contrast to the presidency of Bill Clinton, when a matrix of policies caused real median incomes to rise 23 per cent for blacks and 13 per cent for whites.

If the tax wedge declined, shouldn’t median income have INCREASED??

booger

August 13th, 2010
12:58 pm

Last week the NYT ran three seperate articles on why businesses were not hiring. The writers quoted many sources, mostly economists, who put forth many theories including one who felt it was a coordinated effort by all businesses to discredit our President. With all their efforts, you would think one of the writers would talk to a business owner or manager. It didn’t happen. Not one was interviewed. We have an administration who has totally shunned business as a partner at his table, and a press who only talks to academics, and we wonder what’s wrong.

Kyle Wingfield

August 13th, 2010
1:06 pm

Compromise: I favor tax policy that’s as broad as possible, so I tend not to like carve-outs that add noise to the system. And it would be far more efficient to stop adding (or taking actions that threaten to add) taxes on employers. We need to get away from paint-by-numbers tax policy.

HDB: You’re free to have your doubts, I guess, but OECD numbers are widely respected. As for the effect on the median income, obviously there are more factors to that besides the tax wedge…but the tax wedge is one area where government tax policy has a direct impact on employment levels.

Kyle Wingfield

August 13th, 2010
1:07 pm

And on wages, I should have added at the end of that last comment.

Would Kyle compromise?

August 13th, 2010
1:15 pm

Compromise: I favor tax policy that’s as broad as possible, so I tend not to like carve-outs that add noise to the system. And it would be far more efficient to stop adding (or taking actions that threaten to add) taxes on employers.

It would be far more efficient Kyle, if you could get such policies passed. Not likely in this environment.

I say the idea is worth floating if for no other reason that if the Democrats knee-jerk opposed it, it shines a light on how anti-business some in the Democratic Party are. At the very least it moves the needle on the debate and forces the Democrats to defend opposing a tax cut that is guaranteed to create jobs, does it not?

Sick of Dems

August 13th, 2010
1:16 pm

FAIR TAX !!!!!!!!!!!!

Would Kyle compromise?

August 13th, 2010
1:21 pm

Fair Tax people might want to stop trying to pass off a $1 loaf of bread costing $1.30 under the Fair Tax as a 23% tax, who Joe Six-Pack sees it as 30%. Yes I understand the inclusive/exclusive reasons why, but unfortunately it just gives fodder to people who say Fair Tax advocates are fudging numbers.

Kyle Wingfield

August 13th, 2010
1:22 pm

Compromise: But I don’t think it would be very effective. Not every tax cut is created equal. Supporting bad or ineffective ones only makes it harder to get good, effective ones passed.

Would Kyle compromise?

August 13th, 2010
1:26 pm

I can see your point of view Kyle, but if for no other reason than it would force Democrats to oppose a tax cut that is absolutely guaranteed to create jobs, I’d like to see it out there, just so joe average could have a clear cut example of the difference in philosophies of the Democrats and Republicans when it comes to taxes.

God knows joe average needs all the help he can get; look who he votes for.

jconservative

August 13th, 2010
1:33 pm

Kyle see your Bureau Labor Stat charts for the years 1980 – 2010.

Thanks

HDB`

August 13th, 2010
1:36 pm

Would Kyle compromise? August 13th, 2010
1:26 pm
“I can see your point of view Kyle, but if for no other reason than it would force Democrats to oppose a tax cut that is absolutely guaranteed to create jobs, I’d like to see it out there, just so joe average could have a clear cut example of the difference in philosophies of the Democrats and Republicans when it comes to taxes.”

Compromise — Question: The Obama Administration presented a tax cut plan for small businesses so that they COULD create more jobs….but the Republicans ALL voted against it; what is a clearer example of policy differential that you wish to be evident??

Would Kyle compromise?

August 13th, 2010
1:40 pm

HDB if Obama really did present a tax cut plan that did as you say, I would hope they would bang that drum beat over and over again when they are being raked over the coals for their anti-business stance.

I see a lot of merit to some of the arguments put forth about how Obama policies will lead to economic adverse consequences, so I would say that if they won’t they need to do a better job articulating why they won’t.

Richard

August 13th, 2010
1:56 pm

Kyle,

Just curious, but why do the Bush tax cuts expire at the end of this year. There’s a bunch of republicans saying they should be made permenant, but the cuts were passed by republicans. Why didn’t they just make them permenant when they originally passed them so this would essentially be a non-issue?

Southern Comfort

August 13th, 2010
2:02 pm

Richard

They’re required to sunset in 10 years because Republicans used reconciliation to pass them.

booger

August 13th, 2010
2:24 pm

HDB,

You are fully aware that the bill you are referring to was basically a list of pork and earmarks with a tax bill hidden within. This was just as the extention of unemployment.

Port O'John

August 13th, 2010
2:45 pm

And the Bush tax cuts for the rich were also a primary cause of our whopping federal deficit. I think the GOP would have more creditibility if they would couple tax cuts with spending cuts — in other words: pay for them!

But that didn’t happen. Under Bush we cut taxes for the wealthy and raised government spending. Result: huge increase in debt. But, hey, that was OK with the GOP. But now that dems are in power, debt is a huge problem because, well because dems are in power and the GOP isn’t.

If you really think the GOP (or dems) really give a hoot about average Americans then you live in fantasy-land. All either party cares about is getting power and keeping it. About the only person in D.C. who interests me is the SecDef — yes, I know he is a Republican, but to conservatives he is a RINO who couldn’t get elected dogcatcher in a Red State.

wallbanger

August 13th, 2010
2:46 pm

It is a sorry state, but I always figured my income and taxes were going to support about 4 welfare families, or those on the dole. It is a sorry state of things really, when people believe they have a right to live on the backs of other people. It is what we have come to today. People, in the old days, would rather have cleaned toilets than taken charity. Lots of things have changed and not for the better in this country. I am beginning to wonder if this country is worth saving.

pat

August 13th, 2010
2:50 pm

Good article, it’s way over the head of the average democrat.

TaxPayer

August 13th, 2010
2:51 pm

I suppose Kyle would also have us believe that if we would only extend those tax cuts that the Republicans designed to end this year, in order to pay for their borrowing to fund two wars, an ag bill, prescription drug company benefits, etc., we would magically create an unemployment rate of 4.5%. I believe the appropriate name for such thinking could be something prefaced with “faith based”. What a laffer.

The Aristocrat

August 13th, 2010
2:53 pm

Sorry wallbanger, not only would people rather take charity than clean toilets, they’ll riot to be the first in line.

Frank

August 13th, 2010
2:59 pm

Richard – the Democrats would not allow the Republicans to make the “Bush Tax Cuts” permanent and thus – in order to get any cut passed – they were done so with a limit imposed upon them.

Cuts should be across the board – everyone in this country – rich or poor – should be treated equally.
After all – most of the rich were once poor and they became wealthy by working their way out of poverty.

Frank

August 13th, 2010
3:03 pm

The Obama administration will go down in history as the most anti-business, anti-job, un-American, darkest administration in history. If the founding fathers were alive they would have killed him in a duel

Jefferson

August 13th, 2010
3:05 pm

The Bush tax cuts are going to expire at the end of the year. Congress will cut taxes for those families making less than 250k back to where they are now. Call it deficit reduction.

Grand Forks

August 13th, 2010
3:08 pm

“The incomes of blacks fell and their poverty rates rose 7.9 per cent, compared with 5.1 per cent for whites.”

That’s because white people work for a living.

Don't forget

August 13th, 2010
3:08 pm

So, why did the economy boom after Clinton raised taxes?

Arrogant B@st@rd

August 13th, 2010
3:11 pm

Grand Kleagle Forks, your sheets are ready.

HDB`

August 13th, 2010
3:12 pm

Frank August 13th, 2010
2:59 pm

Check SoCo’s post….he’s more on the point!! Remember….the GOP controlled Congress for the preponderance of the Bush years…….and they had the majority to make the tax cuts permanent…but they chose to use reconciliation to pass the budget…which mandated a 10-yr window! The GOP know that they would leave it to whatever Administration succeeded them….and to use it as an issue to say “tax increase”…..when we all know that this was the design all along!!

Linda

August 13th, 2010
3:13 pm

I compare the debate over the Bush tax cuts to the minimum wage.

In 2007, under a Dem. congress, the minimum wage was increased in 3 stages. According to a Wall St. Journal article, “The Lost Wages of Youth, 3/5/10, “rarely has a law hurt more vulnerable people more quickly.” Teen unemployment went from 14.9% to a peak of 27.6%, for black teens to a peak of 49.8% & for black male teens to 52.2%.

It would only make sense (to some) that if employers were required to pay the least experienced workers with the fewest skills a higher wage, that the workers would all be making more money.

It doesn’t & didn’t work that way. It caused them the loss of their jobs.

Raising the Bush tax cuts will also result in job losses.

Jefferson

August 13th, 2010
3:22 pm

Use the logic business uses, “I don’t pay taxes, I just charge them back to my employer”.

Wahoo

August 13th, 2010
3:26 pm

So, why did the economy boom after Clinton raised taxes?
—————-
Primarily for a lot of reasons that had nothing to do with Bill Clinton. Despite the fairly narrow view held by some on the left regarding economic growth and taxes, marginal tax rates are only one component impacting economic activity, not the whole enchilada. Second, there were massive amounts of production in Asia that came online and could feed surging US demand without causing significant inflation. Third, new technological developments resulted in a plethora of new products becoming available, and rampant competition in the tech sector combined with low cost manufacturing assured that these products would be available for the US consumer at attractive prices. Fourth, an increase in the sophistication of the capital markets (i.e. the rise of hedge funds, expanded syndicated loan products, increased private equity flows, etc.) allowed more (and smaller) companies to gain greater access to capital in order to invest and grow.

Clinton should be credited for having stayed out of the way, which, from an economic standpoint, is pretty much what he did.

stranger in a strange land

August 13th, 2010
3:31 pm

The people that write the tax laws (Rangel, et al) are so disconnected to the real world that they simply do not, cannot, or will not understand any of this.
Sick of Dems @ 1:16 – flat tax – definitely. However, one thing the power elite in DC do understand is that this would be a massive power loss for them. Therefore, short of complete and total collapse of the system, or an armed insurrection – it just won’t happen.
What will likely happen is more band aids on fingers and toes all whilst the jugular vein has been severed.

The Aristocrat

August 13th, 2010
3:32 pm

Clinton staying out of the way was a major contributing factor. His interference would have only hampered the economic boom, much to the way that Obama is hampering its recovery.

CJ

August 13th, 2010
3:39 pm

A few comments:

1. In this anecdote, approximately $10,000 of employee benefits (e.g., various forms of insurance), likely provided to compete for employees in the free market, are incorrectly attributed to the “tax wedge.” Fudging the numbers by blaming the government for market related expenses is a bit dishonest.

2. As far as this employer being concerned about his obligations to the government going up, what uncertainties are he concerned about again? He blames government for potential health care increases when multiple independent reviews indicate that the Affordable Care Act will reduce deficits, reduce the growth of health insurance premiums, and extend Medicaid for twelve years? In fact, to the extent that medical premiums are currently high, we can blame free market tendencies (i.e., gouging). Again, it’s a bit dishonest to blame government for costs arising out of free market policies that you condone.

3. Obama and Democratic leadership in Congress have been clear about which Bush tax cuts they would allow to expire (none of which would effect his costs related to the employee he described). Again, no uncertainties there. To the extent that the top two rates would go up, it would only affect this employer if he figures out a way to scrape by on $250,000 of personal income per year. And assuming that’s the case, his income tax would still be lower than they were during the Clinton years (as I recall, hiring was pretty good back then).

If this employer chooses to believe that Rush Limbaugh and Glenn Beck know more than independent economists, then we all suffer. But we can’t ask our representatives to govern based on the views of employers who stubbornly cling their ignorance. That said, the truth is that if this employer had enough demand (customers) for his business, he’d hire—no matter what Sean Hannity tells him.

Wahoo

August 13th, 2010
3:45 pm

Clinton staying out of the way was a major contributing factor.
______________

I wouldn’t quite put it that way, but I think I understand what you’re saying. He deserves credit for not having mucked it up. But the reality is that his economic policies did almost nothing to create the economic growth we enjoyed in the mid-late 90’s. Most of the factors that led to the growth were wholly outside of his control. To your point, he certainly could have screwed it up, but he let the cycle play out without interefering.

The Aristocrat

August 13th, 2010
3:50 pm

Clearly, Wahoo. The groundwork was laid in the 80’s for the boom we enjoyed in the 90’s. Clinton, in not interfering, allowed the market to proceed along its natural course- prosperity. No President has seen the effects of their economic policy while in office because it typically takes 10 years for policy-making to impact the economy at the Joe Sixpack level.

Kyle Wingfield

August 13th, 2010
3:50 pm

CJ: The $18,000 doesn’t include the health insurance costs that he mentions. It includes only the taxes set by the state and federal governments…that’s why he referred to $44,000 in pay and $12,000 in benefits separately from the $18,000 tax wedge. And I suppose you think he should just listen to the “multiple independent reviews” and not investigate on hiw own what the costs will be to his specific business? Or maybe you think Sean Hannity called him up and gave him that information?

As for what Obama and the Democratic leadership have been clear about: What is clear is that they haven’t taken a single action to enact the kind of plan you mention. Obama has been in office for almost 19 months; there’s nothing that says you have to wait until Dec. 30 to extend something that expires after Dec. 31. Yes, Obama put those rates in his budget plan — but the Democrats have already made clear that they’re not going to pass a budget, as such, this year.

If extending some of the cuts is the plan, where’s the bill? Why have they had time to pass or debate tens of thousands of pages of other legislation — legislation that points to the higher taxes employers fear — but not to address this?

Don't forget

August 13th, 2010
3:51 pm

Wahoo

August 13th, 2010
3:26 pm
See above
——————-
Thanks for making my point Wahoo. You’re argument shows that economic conditions have way more to do with the health of the economy than tax policy. We had top marginal tax rates at around 70% from the early to mid thirties to the late seventies and we had good times and bad times during that period.

Jefferson

August 13th, 2010
3:52 pm

Don’t worry the bill will come.

RW-(the original)

August 13th, 2010
3:54 pm

Well I see Paul got Jay B’s blog shut down. Good job, Paul

/sarc

They’re required to sunset in 10 years because Republicans used reconciliation to pass them.

SoCo,

That’s only partially right. Under the Byrd rule during reconciliation anything that is deemed to significantly add to the federal deficit 10 years out needs 60 votes. Since in the eternal idiocy of the way tax cuts are considered costs to the government they are always said to add to the deficit so the only way to get the tax cuts through was to stop at ten years.

EJ

August 13th, 2010
3:56 pm

Before we identify bad or ineffective tax cuts, shouldn’t we first eliminate the bad or ineffective taxes?

Taxes should be applied equally to all. They should not be buried or hidden. To continue doing so allows government to pull the wool over our eyes as to what we are actually paying.

And if taxes were applied equally across the board, lobbyists would have no role in changing our laws.

Southern Comfort

August 13th, 2010
3:58 pm

RW

I knew it was something to that effect. I wasn’t sure the exact reason. And yeah, thanks Paul… lol!!!

Robert

August 13th, 2010
4:03 pm

I can’t wait for another Republican to lead us, sunshine and roses. Just like Georgia for the last eight years.

josef nix

August 13th, 2010
4:03 pm

Well, well, well…y’all can run but you cannot hide! What did Paul do?

Wahoo

August 13th, 2010
4:04 pm

CJ,

I think you make a couple of good points. I do, however, think that articles like this highlight the difference between the cost of an employee to the employer, and the amount of money that the employee puts in their pocket. We should all be reminded of that from time to time.

Irrespective of the amount of that wedge, for a prudent employer to hire, they will want to ensure that the marginal employee adds value. The more it costs an employer to hire, the less that employer will hire because the threshold of the marginal employee to add value will increase.

And you may be right that independent reviews of the health care reform will lead to reduced health care premiums. Unfortunately I don’t think most employers buy this. Caterpillar certainly doesn’t – they booked a $100m charge in 1Q directly related to the health reform, and they weren’t the only one.

Lastly, it is somewhat problematic that we are in late August and we don’t know what tax rates will be for next year for the various buckets of income. Companies and people do like to plan ahead as it relates to taxes, and for some of us out there, an increase in marginal rates from 35 to 39.6 is a big number.

Jefferson

August 13th, 2010
4:08 pm

If I was at 35%, I would plan on 39.6% — better safe than sorry,eh?

RW-(the original)

August 13th, 2010
4:09 pm

Kyle,

Nice place you got here and thanks for clearly pointing out the true cost of employing someone. If I might add this is why I quit using employees and went strictly to using contractors.

josef,

Paul complained to the AJC about a truly offensive poster and rather than get rid of the poster or his posts they just locked down the blog and left all the filth up for all to see.

Baffled

August 13th, 2010
4:11 pm

Would Kyle Compromise, your idea has been in a couple of jobs bills pushed by Mr. Obama, but as usual Republicans in the Senate keep blocking them.

Wahoo

August 13th, 2010
4:11 pm

Don’t forget,

I don’t think anyone will argue that overall economic conditions drive economic activity more than tax policy AS LONG AS a change in tax policy isn’t too significant.

That being said, I don’t think any serious economist would take the position that an increase in marginal rates doesn’t negatively impact economic activity, and vice versa.

So tax rates matter, and changes in tax rates matter, but they’re only one piece of the equation.

josef nix

August 13th, 2010
4:13 pm

wallbanger

If your taxes can support FOUR welfare families, what the heck are you complaining about….that’s a hefty income/portfolio/business you’ve got…