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.”