By Sam Foster
This is just a little Tax Day reminder that the taxes you pay are much, much higher than the tax bill you received this year.
If you are employed, FICA taxes are broken down into two portions; a 7.65% portion that you pay and a 7.65% portion your employer pays. Now, what percentage do you pay if you are employed?
If you said, 7.65% you are very wrong. In fact, you pay the full 15.3% tax, plus expenses to comply with reporting. Don’t bother checking your W-2, because you won’t find it there. According to your tax statement, you paid 7.65% the portion you aren’t seeing is lost due to tax shifting.
A statute only says who is responsible to collect and remit a particular tax. It does not specify exactly how that money is obtained. When the party that bears the burden of paying a tax is different than the party outlined in a tax statute, tax shifting has occurred.
Take our FICA tax example above. You are aware of the 7.65% percent tax that you are required by law to pay, but how do you wind up paying the employer portion as well? It has to do with how companies think of a tax. In FICA’s case, companies view the tax as a cost of employment, which means it is lumped on top of your salary and benefits. Thus, without FICA taxes to your employer, you’d probably be paid higher wages. The company shifted the cost of the tax onto employees by suppressing higher wages.
FICA isn’t the only tax you are paying. Heritage points out that workers pay corporate taxes as well:
Initial Incidence of the Corporate Income Tax. No competent student of taxation believes that corporations pay the corporate income tax. Only people pay taxes. Things and abstractions do not pay taxes. A corporation is, in law, a legal person, but that is, in fact, a legal fiction. Therefore, corporations do not really pay the corporate income tax. Conservative Nobel Prize-winning economist Milton Friedman is well known for espousing that view, but liberal economists share it as well. The liberal Nobel economist Wassily Leontief told The New York Times 20 years ago:
Corporate income taxes fall ultimately on people. Economists have tried but have never succeeded in finding out how the weight of these taxes is ultimately distributed among income groups. There can be little doubt that elimination of corporate income taxes would simplify our tax system and limit its abuse…
…Importantly, the burden of the corporate income tax may not fall on shareholders. A corporate tax change could induce responses that would alter other forms of income as well. For example, some of the burden may be shifted to workers through lower wages, to consumers through higher prices, to owners of non-corporate capital through lower rates of return on their investments, or to landowners through lower rents. This shifting might not happen quickly, so the short-run incidence could well differ from the long-run incidence.
Meanwhile, the rich are able to avoid statutory tax rates by employing resources to find tax credits and benefits, further shifting tax burden. Chris Christie recently found out that as NJ tries to raise revenues on the backs of millionaires, revenues fall because the rich are able to shift tax liabilities to lower their tax bills. That means that when shortfalls need to be paid, it’s not coming out of the pockets of the rich, they have the resources to dodge the bullet. In NY, Rush Limbaugh simply moved to a non-income tax state; the rich go Gault.
So, when you mail out your tax form this morning; smile. Because you are paying so much more than what’s on your tax bill.