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Dissecting Taxation - Part 2

In part one of this topic, I attempted to analyze some of the psychology behind the payment of individual income taxes. In summary, the "rub" boils down to resentment and class envy.  In other words, the Liberal argument is, "You make more, you should pay more."  The Conservative argument is, "I shouldn't have to pay more until you either pay some or cut back your spending."

The arguments and "battle lines" are somewhat different when it comes to payroll taxes. In fact, the nature of the payroll tax is, in my humble opinion, what is stalling the economy right now and figuring out a solution here will either crash the economy or send it skyrocketing.

As an employer, I pay several employment-related taxes.  As an employee, you typically have deducted from your paycheck federal,  state, and sometimes local income taxes, Social Security taxes and Medicare taxes. Although you can often recover the federal, state and local income taxes that are deducted from your pay, you can't recover the Social Security and Medicare taxes. Of course, some employees also have other deductions taken from their pay for union dues, health benefits, and other benefits offered by their employers. The employer also pays Social Security taxes, Medicare taxes, unemployment taxes, and their share of any agreed benefits, such as insurance, retirement or other "perks."  The employer is not paying any portion of the employee's income taxes.  Therefore, if personal income tax rates go up or down, the employer might have to deduct more or less. However, it typically does not impact the employer's bottom line.  If Social Security, Medicare or unemployment taxes go up or down, they do affect the employer's profits. Similarly, if the minimum wage rate goes up, employers are affected.  When the employer is affected, he or she has two options: reduce their PROFITS or reduce their WORKFORCE.  Usually when payroll taxes are increased, there is usually not an offsetting increase in income (meaning the employees don't become more productive, just because the employer has to pay more taxes).  Therefore, the employer's decision is often to reduce the size of their workforce.  On the other hand, if an employer is making a sizeable profit from the existing workforce and wishes to increase that profit, they will often decide to increase their workforce so that they can make more profit.  An employer is not going to hire more employees if the employer knows he or she will lose money by doing so. Logically, an INCREASE in the workforce makes the generally population happy, because there are more jobs, more income, more spending in the community and more general harmony in the country, while a DECREASE in the workforce makes the general population sad or even angry because that causes loss of income, less available funds to spend in the community, more resentment of the "greedy" employer who sacrificed their employees in order to earn obscene profits.

The argument on both sides is understandable. If I am laid off from a job, I will resent the employer, regardless of my understanding of the fact that he or she had to do it. Of course, my logical position will be that, if there must be a layoff, it shouldn't involve MY job.  If I am the employer who wants to earn a profit (and who doesn't?), I have to decide how I can maintain a profit when I am now forced to pay more in taxes for my employees.  In surveying the status of the business, it makes sense to cut out those areas that are not as profitable. Therefore, employees are usually let go.  Usually, that is a difficult decision for any employer to make.  It is not as it is often portrayed in books and movies that the sinister boss sits in his office, gleefully watching his devastated former employees cleaning out their desk and plodding hopelessly off into the street. It is always a difficult decision to terminate an employee.  However, one must understand that if an employer has to choose between reducing their own income and reducing yours, they will typically choose to reduce yours.  That is their prerogative. After all, it is their business.

Currently, employers are staring at federal laws that may require them to pay the cost of health care for their employees.  If that is the case, such additional costs will take tremendously from their bottom line. Although some may be willing to do that for their existing employees, many do not want to risk having to pay that cost for new employees hired after the health care mandate.  Therefore, most employers are sitting and waiting to see what will happen with the law before they start hiring.  Those banking on the health care laws being repealed, thrown out by a court or modified, are waiting to hire.  Those individual needing jobs and seeing that many businesses are earning large profits but not hiring are frustrated by that fact. 

Most people want to work.  They want to be productive.  More importantly, they want to feed their families.  Most usually can care less about what sort of profit their employer is making, as long as they are paid a fair wage.  However, the determination of that fair wage is often the subject of dispute between employers and employees.

In the Christian Bible Gospel of Matthew there is a parable about an owner of a vineyard who went out to hire employees.  He found some early in the day and agreed to pay them a fair wage for the day.  Later, he went out and found others to work.  Still later, he found others and invited them to work as well.  Finally, just before the end of the work day, he found others to work.  When it came time to pay them all, he started with the most recently hired ones and paid them for a full day's wage.  When the ones who had worked the entire day stepped forward, they expected to receive more and were mad that they were paid the same as the others who had worked much less. Although the moral of the parable is much more inciteful, it is also clear evidence of the nature of people to expect to be paid more for doing more.  Similarly, it is the nature of people to want more if they are helping the employer make more.  Consider professional athletes who sign long-term mega-contracts for millions of dollars.  Even though the agreement might be that the athlete is to receive $3 million a year for ten years, when the athlete has an extremely successful year halfway through the contract term, they want to renegotiate their contract, because they consider themselves more valuable to the employer (owner of the team) and are therefore allowing the employer to make more money.  I somehow doubt many such athletes go to the employer when the athlete has been injured or has had a bad year and DEMAND that their contract be reduced!

The fact of the matter is that an employment agreement -- whether an individual agreement or a collective bargaining agreement -- is a contentious relationship.  The employer, whether consciously or subconsciously, generally wants to pay as little as possible for as much work and effort as possible from the employee.  The employee, whether consciously or subconsciously, wants to receive as much as possible for as little effort as possible.  As a result, problems arise when the employer perceives there is not enough effort being given or the employee perceives he or she is not receiving enough compensation.  In a pure setting, that is really all that drives this relationship.  However, the government throws another wrinkle into the relationship!  It is the government that mandates whether or not the employer is paying enough or, in some cases, paying too much.  It is the government that mandates safety standards that can, and usually do, increase costs of employment to the employer.  It is the government that mandates contributions to unemployment plans which increases costs of employment to the employer.  Finally, and most recently, it is the government that mandates benefits (i.e., health benefits) that must be provided to an employee which increases costs of employment to the employer. 

When economic times are good, many of these added costs are easy to absorb. It might mean the employer is making a 19% profit, instead of a 22% profit.  However, when economic times are not good, those costs are sometimes the difference between breaking even and losing 3% or the difference between making a 1% profit, or losing 2%.  In those times, an employer must reduce costs, which often leads to reducing employment costs.  The government cannot require that an employer must hire additional employees.  However, the government can and has required that an employee be paid a certain wage and receive certain benefits.  It is in the face of those requirements that employers have balked and either refused to hire or have reduced the size of their staff.

When economic times are hard, I have had attorneys looking for jobs volunteer to work at little or no pay, just to have a job in our office.  I have received resumes for clerical positions where individuals are willing to work for minimum wage.  I am sure in many unskilled labor positions, there are individuals willing to work at almost nothing, just to be able to earn something.  However, government regulation requires they be paid a minimum amount.  Additionally, due to government "assistance" in the form of welfare and/or unemployment benefits, there are workers unwilling to work for some lower paying jobs, because it will cause them to lose their government benefits or will require them to exert effort to earn as much or less than what they receive in government benefits for not working.

Although many people laugh when they hear the phrase, "I'm from the government and I'm here to help," it is clear that the government is trying to do what it does to "promote the general welfare" of its citizens. Always, there will be government representatives arguing for more government assistance, and always, there will be people who try to take advantage of such assistance.  The government rightfully should monitor working conditions. That wouldn't have been necessary, had employers been more considerate of their employees.  However, they were not and the government stepped in. The government rightfully should mandate a minimum wage. If employers had paid employees fairly, that would not have been necessary.  However, it is quite clear that there is a vast disparity between what an employer and an employee might consider a fair wage.  Should the government provide unemployment compensation to someone out of work?  Clearly that answer is yes.  However, not so clear is the question of how long it should be paid.  In times past, my observations have been that, coincidentally, the laid off employee seems to find new employment about the time his or her benefits run out.  Therefore, if the benefits have a defined period, it gives the employee a timeframe in which to find work.

Part of the existing dynamics of the potential workforce seem to be cultural issues.  Republican presidential candidate and former House Speaker Newt Gingrich was recently criticised for his condemnation of the Occupy Wall Street participants, when he said "Go and get a job after you take a bath."  However, the point is well taken in that many individuals (not all!) presenting themselves for employment do not meet the standards of their chosen potential employer.  They come for employment dirty, smelly, or covered in body piercings and tattoos.  They are unkempt and have lack basic social skills.  A friend recently told me of an interviewee who, during his employment interview, took out his cellphone -- while still listening to the interviewer -- and returned a text message!  Anyone want to guess whether that individual was hired?  I have been in stores where the person in front of me, covered in tattoos and body piercings, uses food stamps to purchase their groceries, and then pulls out a wad of cash to buy their cigarettes and beer.  I am sure most of you have seen the "homeless and out of work" signs on the street corners with individuals receiving dollars from well-meaning passers-by who, in reality, are not homeless, but just don't want to work.  I want to say that I firmly believe that it is a minority of recipients who do try and "cheat" the system.  However, the public perception of the welfare system is viewed by many as being filled by such individuals.

How do these observations of mine relate to the issue of payroll taxes?  It is quite simple.  It is a fact that an employer usually needs employees to conduct his or her business.  How many employees the employer needs is a factor of the productivity of the employees minus the cost of their employment.  The productivity of the employees is influenced by the demand for the product or service of the employer.  The demand for the product or service of the employer is dictated by the strength of the economy.  The strength of the economy is driven by numerous factors, one of which is government intervention.  As an example, in 1991, Congress passed a luxury tax on large items, such as yachts.  As a result, demand for yachts dropped so much that a company in Rhode Island that built yachts had to lay off their employees and shut down.   Therefore, how did this luxury tax benefit the economy? A friend of mine would regular complain, when Sen. Edward Kennedy would promote another increase in the minimum wage, that he (my friend) was going to send Sen. Kennedy a picture of his workforce, and ask the Senator to circle those employees my friend should lay off, because he could not continue to pay all of them, if the minimum wage increased again.  Indeed, tax increases affect the strength of the economy.  If income taxes increase, consumers have less to spend and, as a result, will elect not to purchase as many products or services as they would otherwise.  If payroll taxes increase, employers who choose to retain their same number of employees usually increase the price for their products or services to compensate for the increased cost.  That usually results in consumers buying less of a product or service (lowered demand), which usually requires the employer to make less of the product or offer less of the service (lowered supply), which usually then requires the employer to reduce his or her workforce (i.e., lay off workers).

Let's take a scenario where governmental payroll costs to an employer are reduced by ten percent.  Obviously, an employer could pocket that money and increase his or her bottom line by ten percent.  If that is done, the employer is usually still using the increased profits to benefit himself or herself (i.e., spending the money in the economy) or using it to replace or improve existing business assets (i.e., spending the money in the economy). Such uses of that money benefits the government (more sales taxes) and benefits other sectors of the economy. On the other hand, if the employer is driven by making more money and also possibly expanding their business, they will use the savings to hire more employees as well as to invest in better plant and equipment. Of course, there are always the distrustful souls out there who don't want to offer employers the chance to reinvest that ten percent, fearing they won't do that.  As a result, they do not want to ease any controls (taxes) over the employers.  This is similar to the current Liberal position that decreasing taxes doesn't grow the economy.  Yet, those same people now argue that the government should mandate MORE taxes on employers as a way to grow the economy. I fail to see how that is beneficial.  A few years back, as a result of government and public pressure, many Wall Street firms did not pay their employees the sizeable bonuses they paid in years past.  As a result, many New York businesses suffered, since those highly-bonused employees usually used their bonuses to buy luxury items in New York City.  Therefore, the failure to pay the bonuses rippled across the economy and, most likely, closed several businesses or required some layoffs.

It is my opinion that the economy works best with fewer governmental controls.  Will there be problems in the future?  Of course there will.  In fact, as has been pointed out before, if the business community took care of  all social needs, we wouldn't need the government involved in that aspect of society.  However, the present festering boil in the economy is how to make more jobs available.  The general consensus is that employers do want to hire and to increase their businesses.  However, they are not doing so because they are afraid to do so.  If you are an employer (and, even if you are not, put yourself in this position) and you need more employees for your company, do you hire them now, when there is a risk that, in less than two years, you will be required by law to pay for their health care, or do you wait to see if there is some clarification in the health care laws?  If you hire them now, do you then lay them off if the health care mandates become effective (and risk the public scrutiny for doing so), or do you reduce your profits so that you can pay these benefits?  Realize that benefits are in addition to wages paid for their services.  Former Speaker Nancy Pelosi stated that there was a constitutional right to health care.  Although I don't recall seeing that in the Constitution, I realize that sentiment is the force that is driving the Obama administration's goal of providing universal health care.  However, it presently appears to be an example of the adage of "Winning the battle, but losing the war."  The administration may have, through whatever means you wish to allege, obtained the passage of their health care act.  But, since the business community is using it -- rightfully or wrongfully -- to freeze or decrease employment levels, will it be that the passage of health care will cause a complete economic collapse?  Reducing instead of increasing payroll costs is the logical way to grow the economy.  The sooner our leaders figure that out, the sooner our economic system will start moving forward.  It has always worked in the past.  It will work again.

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