Opposite of Money

Recently, my mother considered quitting her current job but asking the same company to immediately hire her back as an independent contractor. I asked her, what's the point? You're doing the same job.

She said, if I were hired on as a consultant, my salary would be 200% of what it is now. That is, 100% higher. Why? Congress currently levies enormous taxes on labor. Think about it: the Social Security and Medicare payroll taxes, unemployment benefits and health insurance programs eat up a sizable chunk of labor profit. (And might be one of the reasons why, all other things being equal, firms would outsource to countries with more favorable labor laws even if the standard of living was just as high)

You might be asking (and you'd be right) Congress levies these taxes on employers. That is to say, the statutory incidence (the people required to pay by law) are the corporations, so why should employees take such a huge paycut?

Research shows that the supply of labor hours in the United States is relatively inelastic. What this means is, the amount of work hours available to a firm doesn't change depending on the wages the firm pays. Obviously, this depends on the labor being sought - one of the reasons educated workers make more money is because there are fewer of them, and they have more options, meaning the elasticity of labor supply for, say MBAs might be greater than for burger-flippers at McDonald's. (On a side note, educated workers are more likely to be married or cohabitating with a higher-earning partner, which also increases the elasticity of their labor supply.)

What this means is that firms can pay whatever they want, and still attract workers. They might attract better workers if they pay slightly more, but workers will still bear most of the burden of labor taxes. What does this mean for people like me? Let's say my summer salary is $10/hr (totally hypothetical - ha!). Every time I get my paycheck, I see two federal payroll tax deductions. The first is for Social Security - a charming 7.65%. The other is Medicare - another 1.45%. That cuts my check down to $9.10/hr. According to Congress, my employer also pays the same percent for Social Security and Medicare. However, according to economics, I also pay my employer's percent of the payroll tax, in the form of a lower wage than I would otherwise earn. The total taxes levied for Social Security and Medicare together are 18.2%, and I pay most of it.

But now consider this: with the costs of Social Security and Medicare rising out of control, I will certainly receive less from both these programs than I paid into them. Essentially, I am paying almost 18% of my annual income for benefits that I may never receive. If I'm a married person whose health insurance comes through my spouse, I'm also paying for health care benefits that I will never take advantage of.

Basically, corporations pass the cost of employment on to us. And we (the rising generation) might not have anything to show for it.

This is not how the system is supposed to work. Kudos to George W Bush for trying to reform it - although his plan, obviously, has serious flaws of its own.