One of the biggest tax myths

Can we clear something up that’s been bothering me?

Thanks.

The employer’s half of Medicare and Social Security taxes does not come out of employees’ paychecks. This myth gets passed around among wonks who should know better time and time again, for example recently in a column by the excellent Allan Sloan.

It’s pure hogwash-bathed malarky.

There’s a popular assumption that whatever an employer spends on payroll defines the amount they’d be willing to put into a paycheck. Essentially, if I hire someone, I have a basket of X dollars to spend on her and am indifferent to how this money moves around. In that scenario, I can either send 7.65% of her paycheck to the government or add it to her total pay with equanimity.

This is deeply unrealistic.

While suitable for an economics textbook in which the market behaves competitively and rationally at all times, it completely ignores the reality that two major factors define a paycheck: what the employer can afford and what the worker will accept.

And workers will accept what they make right now. We know that because they do. No evidence suggests that uncompetitive wages heavily influence current labor force participation rates.

That 7.65 percent doesn’t come from income because employers would never pay it in the first place. If today’s market establishes the base wages that workers will accept (demonstrably true by the fact that workers accept it), then there’s no reason to believe that companies would distribute more money out of the goodness of their hearts. If the market were white-hot competitive, maybe. If that’s what it took to lure in the best talent, we might see a certain-percent pay bump for those sectors.

The broad reality though? Employers pay what the market will bear, and the market doesn’t need that cash going to employees’ pockets. So it won’t.

And the corollary idea that, because of all this Americans actually pay 15 percent in FICA taxes? And so 89 percent of Americans pay more in FICA than they do in income tax? That’s just dumb.

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