Published: August 08, 2008 11:37 pm            

What is not seen often can hurt the most

EDMOND — Some issues this election season are obvious. Every candidate wants to discuss their ideas on the mortgage mess, the credit crisis, the Iraq war and high gas prices. Yet there are other issues, also important, that are much less obvious. In fact, one could say they are “hidden” — like the hidden taxes we have to pay.

Each year Americans pay hundreds of billions of dollars in hidden taxes. Take, for example, the Social Security and Medicare payroll taxes. Part of the payroll tax is obvious to everyone who checks their pay stubs and sees the FICA and Medicare tax withholding. For most workers, these taxes amount to 7.65 percent of one’s earnings. According to the Social Security Administration, in 2007 workers paid a total of $424 billion in these taxes. However, many people do not realize that this is only one-half of the payroll taxes they pay.

The payroll tax system was designed to ostensibly split the tax burden between employees and employers. So, when workers pay $424 billion in payroll taxes, employers are also required to pay $424 billion, too. Most economists believe, however, that workers effectively pay both portions, including the employers’ share.

Here is what happens. If an employer is willing to pay $100 to hire a worker, the employer does not care if all $100 goes to the worker, or if only $93 goes to the worker and $7 goes to the government. From the employer’s perspective they are still paying $100 for the worker. Thus, if the employer has to pay a payroll tax they reduce the wages they are willing to pay to the worker. Effectively, the worker pays this payroll tax in the form of lower wages.

This is not the only hidden tax we pay either. According to the Congressional Budget Office, last year the federal government collected $370 billion in corporation income taxes. While many people think that faceless corporations can pay taxes, in reality only people pay taxes. So who pays the corporation income tax?

Naturally, shareholders pay some of the tax. The corporation income tax lowers corporate profits, which affects shareholders in two ways. First, lower profits mean lower dividend payments. Second, lower profits depress the value of a company’s stock, negatively affecting shareholder wealth. But these lower corporate profits also make corporations less willing to hire workers, and less willing to pay them as much.

Consequently, most economists recognize that workers also pay some of the corporation income tax, again in the form of reduced wages. In the end, both shareholders and workers share the corporate income tax burden.

These taxes never show up on a pay stub, nor do they show up on a Form 1040 … but we pay them nonetheless. They are real, they are large (to the tune of $800 billion in 2007), even if they are hidden. Essentially, 30 percent of our federal government is financed by these hidden taxes.

Now, some might not want to know that the American people have been paying $800 billion of hidden taxes each year. But this is a case where what we do not know can hurt us. These hidden taxes effectively hide the true cost of operating our federal government, essentially making it seem as if we are getting our government services at a discount. After all, we fantasize, we can get 100 percent of our government services and have to pay only 70 percent of the bill, leaving businesses to pick up the remainder.

But in reality, businesses pay nothing … the taxpayers are picking up 100 percent of the cost. Which makes me wonder if we would have the same size of government if we knew just how much we were paying for it.

We economics professors are fond of telling students to focus not just on what is seen, but also what is not seen.

Frankly, we would have better public policy if more political candidates would understand this, too.



MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.

        

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