This seems whacky, yet I cannot refute it (from the comments), tax incidence department

by on November 19, 2017 at 12:49 am in Economics | Permalink

Here is an unrelated topic, but part of the general topic of tax incidence. Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn’t that mean that, while their actual salary may be lower than their official nominal salary, they actually don’t pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.)

For example, suppose a private firm and the federal government both value a worker’s output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees!

Doesn’t this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive — the usual cited distortion — they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers.

That is from BC.

1 Nominull November 19, 2017 at 1:00 am

Nah. By hiring a worker, the government takes him or her away from the private sector, where his or her wage would have been subject to tax. The money the government pays in income tax isn’t free, even though it pays it to itself, because it’s forgoing the income tax it could have gotten if someone else had hired the worker.

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2 Pshrnk November 19, 2017 at 10:40 pm

+1

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3 JWatts November 20, 2017 at 4:49 pm

+1, this seems the obvious rebuttal.

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4 Scott Sumner November 19, 2017 at 1:05 am

Regarding this comment:

“The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*.”

Doesn’t this ignore the opportunity cost of the labor? If the employee in question were not working for the government, he’d be working in the private sector. Either way the government would collect $25,000 in income taxes. So the government deciding to hire that worker doesn’t result in more tax revenue going to the government, as compared to the situation where he works in the private sector. Thus it does actually cost the government $125,000.

I’m ignoring the (vulgar) Keynesian argument where the decision to hire the worker boosts GDP.

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5 mulp November 19, 2017 at 3:13 am

But doesn’t private sector hiring and pay hikes boost consumer demand resulting in businesses having greater pricing power, thus higher profits?

Zero sum.

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6 BC November 19, 2017 at 3:29 am

Replying to both @Nominull and Scott Sumner, that’s a good point, but the worker could also choose leisure (or a lower paying job). The worker pays a tax for working for a non-government employer, not for not working for the government. Granted, if the worker works for the government, then he is precluded from working for a non-government employer, so there does seem to be some opportunity cost to the government there.

Suppose the tax rate were 100%-epsilon. No private employer would be able to afford to hire any workers, but wouldn’t the government still be able to by offering extremely high nominal pre-tax salaries offset by high income tax rebated back to itself? (Assume the government also levies non-income taxes which allow it to pay the after-income-tax wages since there won’t be any net income tax collected if everyone works for the government.)

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7 BC November 19, 2017 at 5:05 am

One more comment about the opportunity cost. The private firm keeps hiring until the next worker is worth slightly less than $100k. The firm will not hire that worker because he requires $80k after tax income to give up leisure, working for less pay at a less stressful job, etc. The government, however, does not face the $20k tax “gap” because that tax is paid to itself. Then, on the margin, doesn’t the opportunity cost of forgone income tax disappear? Doesn’t the government keep hiring beyond the point where the private firm stops so that the alternative to working for the government is leisure, working part time, working a lower output job, etc.?

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8 Jan November 19, 2017 at 5:51 am

This doesn’t make a ton of sense beyond a very theoretical model. The government isn’t a single agency with one giant piggy bank and a uniform set of incentives. The budgeting and payment approaches for federal agencies don’t really allow the above to play out as suggested.

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9 Blair November 19, 2017 at 9:00 am

…yes, the federal government is a large disjointed mess that behaves irrationally on fiscal matters; even Congress cannot enact any semblance of a rational budget. All federal funds are ultimately seized from the private sector — so it certainly makes little sense to debate whether that government taxes-itself in any internal accounting scenario. Taxes flow in only one direction.

10 Trump Fan November 19, 2017 at 10:19 am

If the worker chooses leisure over a then yes, the government loses money, but the same occurs if the worker chooses leisure over a non-government job. The point remains that if the government “crowds out” private employers by poaching their workers, they don’t get any of the money back in income taxes, the worker will be paying X percent in taxes no matter what.

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11 Trump Fan November 19, 2017 at 10:28 am

*If the worker chooses leisure over a government job

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12 TMC November 19, 2017 at 12:32 pm

* Are you pointing out the irony of that sentence?

13 BC November 19, 2017 at 4:42 am

Can we at least say that the nominal tax that appears on federal employees’ tax returns bears no relationship to the actual tax that they pay? For example, suppose we accept Scott’s and Nominull’s point that the government loses opportunity cost of taxes when it hires a worker that would have otherwise worked in the private sector. Suppose also that the government exempted federal employees from income tax. Then, in the original example, the government could hire the employee for $80k instead of $100k due to the tax exemption. However, it would cost the government $80k plus the $20k that it would have otherwise collected had the employee worked in the private sector. So, the employee would produce $100k of output for the government, it would cost the government $100k, but the employee would receive only $80k. Even though, nominally the employee was paying no income tax, in reality he was facing the same tax rate as in the private sector. So, depending on assumptions about opportunity cost, is it fair to say that government employees either pay no income tax, pay the same rate as everyone else, or pay something in between, *regardless of their nominal tax rate*, i.e., it’s impossible for the government to set government employees’ tax rates independently of non-government employees tax rates because the tax is paid to itself?

By the way, before thinking about government employees, I had a similar question about whether anyone pays income tax on US treasuries given that the tax is paid to the borrower, again the federal government. Muni bonds are tax exempt so their pre-tax yields are lower than comparable taxable bonds, roughly by enough to offset the tax advantage for those with the highest marginal rates. The end result is that the tax exemption allows municipalities to borrow at lower rates. What if US treasuries were also tax exempt? Their pre-tax yields would be lower but, in this case, whatever the US government gained in lower borrowing rates, wouldn’t it just lose in tax revenue? (Neglect, if necessary, the fact that some US treasury holders may be tax exempt already.) When the US government pays interest and takes some back as taxes, doesn’t it all just net out to some other equivalent tax-free interest amount? Similarly, when the government pays wages and takes some back as taxes?

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14 Chris H November 19, 2017 at 9:30 am

Technically the math is wrong here, the rate is 20% and the employee in the private sector would have made $100,000 so the opportunity cost isn’t $25,000, it’s $20,000. So the employee’s actual cost is still somewhat discounted from what the government is on paper paying (pre-tax salary=$125,000; after-tax salary plus opportunity cost=$120,000). However you basic point still stands that the government would be paying more than they actually value the employee. Furthermore that should remain true as long as the government and the private sector value the employee at the same rate.

I had previously had thoughts similar to BC’s comment, but this opportunity cost discussion has been pretty eye opening on that idea. The taxation at the same rate as the private sector is a simple means to regain that opportunity costs in a highly complicated tax system where one has a hard time determining ahead of time what deductions might be used. If you just lowered the salary by the official tax rate you’d be significantly overestimating the lost opportunity cost most of the time, but by how much is uncertain unless you have a mechanism to make the employee do the work of figuring out their own tax liability themselves like they do with private sector workers.

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15 byomtov November 19, 2017 at 10:23 am

See Brian Slesinsky’s comment below.

The error you point out is only significant if the government salary is much higher than the private one.

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16 Toby November 19, 2017 at 10:44 am

The government can but why would they? They can also offer 500k. But then they would pay more than the workers can get elsewhere. The opportunity cost of paying 125k is not paying 100k and getting the same workers.

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17 Brian Slesinsky November 19, 2017 at 1:14 am

The word “distort” invites comparison to some “undistorted” composition of the workforce. But markets are artificial constructs with rules decided by humans. Why isn’t any ruleset you pick is just as “natural” or “undistorted” as any other?

Of course, some rulesets are more efficient and more likely to result in good incentives. But it seems better to argue that directly? If you think the salaries of government employees are systematically too high, explain why they should be lowered without reference to “undistorted” markets.

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18 Bailey November 19, 2017 at 5:05 pm

“undistorted” markets refers to “voluntary” buy/sell/trade transactions among humans … as opposed to coercive non-voluntary economic “interventions” by government or criminals. Interventions change what would have been under undisturbed markets. Markets are by definition “voluntary”.

Income taxes are government interventions that always distort the market.
Government spending of those taxes always distorts the market.

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19 Jeffrey Deutsch November 19, 2017 at 9:34 pm

Without government as we know it, we have anarchy/chaos, or warlordism/feudalism/strongman government under another name.

Speaking only of government “interventions into the market” implies some kind of pristine market ordering without government. However, there is in fact no order without government.

Government creates and enforces the rules (including but not limited to definition and assignment of property rights) without which society, much less “free markets,” cannot function.

So as political thinker Stephen Holmes has pointed out, market trading, free from the rules of the marketplace has as much meaning as chess playing. free from the rules of chess.

Mr. Slesinsky is right: “Distortion” has no meaning without a definite “undistorted” order. Since the latter does not exist, the former is at best an empty slogan and at worst a red herring.

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20 Yancey Ward November 19, 2017 at 1:31 am

Isn’t this really what BC is pointing out:

If the federal employees ever had possession of the federal taxes paid and then had to write a check each pay cycle, then, yes, federal employees pay income tax. However, like most income tax payers, they never get the money in the first place- all they get is a notation on a pay stub about what their nominal salary was before they were actually paid- in the end, the employer is who paid the income tax, which of course the federal government then pays to itself in the case of its own employees.

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21 Anon November 19, 2017 at 1:51 am

…..”they never get the money in the first place- all they get is a notation on a pay stub about what their nominal salary was before they were actually paid- in the end, the employer is who paid the income tax”.

Not always true. Say you are at a salary level where you have 1 eligible exemption on the W-4 but put in 10 (the max allowed without having to be reported to the IRS) and consequently have no Tax exemption , come the Ides of April, you will be writing the check to the IRS.

Employer paying it is just a book-entry ; withholding at sourcedoesn’t take away the reality that employees pay the Tax, private or federal employees.

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22 Yancey Ward November 19, 2017 at 11:01 am

First, almost no one does that. I worked for 25 years and never had to write a check at tax filing time. This fairly typical, too. Only the very wealthy largely end up writing checks to the IRS.

Second, if the income tax system were entirely payroll taxes with the employer charged 100% based on the wage paid with tax filers still filing for deductions and rebates, it would be exactly the same as what you have now. You may not be conscious of it, but you, me, and everyone else bases our willingness to work on the actual pay we take home, not the amount on the pay stub, and our employers base their willingness to hire us based not on the net take home pay, but on the entire cost of employing us.

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23 Jeffrey Deutsch November 19, 2017 at 9:42 pm

Mr. Ward, please think twice before speaking for others.

I’ve never been very wealthy, and in fact precisely during my poorest years (least withholding) I’ve had to write checks at tax time. (In fact, one year my return and check somehow never reached the IRS. My late filing and late payment penalties were waived, but I still had to pay interest because I still had had the use of the money.)

I know for a fact that more than a few people deliberately claim 10 exemptions so as to have no withholding. And then they don’t even write checks at tax time.

Also, I daresay for many if not most of us, the gross pay is the salient number in our minds. Many folks don’t even bother to figure out how much their take home pay is. That’s because, among other things, gross pay isn’t just a number — it’s a status symbol.

That’s why people are reluctant to discuss their income. That’s also why some inflation (2% if not more) is considered to be good — workers will quit in anger if the numbers on their paychecks are reduced, but will stay if those numbers stay the same even if their buying power goes down by the same amount. Inflation is how we can reduce real wages while keeping nominal wages constant and thus avoid having to lay off people — based on the psychological dynamic focused on gross pay.

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24 Karl M Kovaciny November 20, 2017 at 8:53 am

Homo economicus writes checks to the IRS. It was widely advised throughout my life that getting a refund was “giving the government an interest-free loan”, and thus I always adjusted my withholding to avoid that.

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25 Michiel s November 19, 2017 at 1:36 am

Why would the government pay +25k instead of +1 to attract the worker?

Second “the government” is not a single entity: the tax is lost to the department doing the hiring, sure in theory the department may be able to get its share back, but then again: is it the department to which marginal tax dollars are assigned? Or does it havy any influence over tax distribution over departments? Seems to me that this is enough for departments to act like other firms.

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26 Greg November 19, 2017 at 11:11 am

Exactly. Any analysis that starts by assuming government hiring managers identify with the IRS/overall federal government seems flawed from the get-go.

This argument also seems to fall down empirically. Government employees typically earn less than private sector workers at the same nominal skill level. This is usually attributed to a desire for a more stable job or a desire to work in the public interest.

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27 egl November 19, 2017 at 12:02 pm

“Government employees typically earn less than private sector workers at the same nominal skill level”. For wages or wages + benefits, this is true only for the most highly educated. https://www.cbo.gov/publication/52637

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28 Colin November 22, 2017 at 2:56 am

Yeah, the original comment only makes sense if “the government” is a single entity. Really, government agencies have budgets, and taxes on employees cut into those budgets. Hiring more people and paying more taxes isn’t going to increase their budgets.

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29 Brett November 19, 2017 at 2:37 am

Ok, except government employees are often paid uncompetitive wages compared to the private employer market. Benefits are usually the carrot to get applicants.

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30 Dangerman November 19, 2017 at 9:04 am

Found the government employee.

(They’re the only ones who still think this.)

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31 Matt2 November 19, 2017 at 9:34 am

Sample size one, but I’m midcareer with time left to get a federal pension and there’s no way I could afford the cut in current pay to take a gov job in my field.

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32 Anonymous November 20, 2017 at 2:15 am

There are studies. Gov workers make more now except at the top of the scale

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33 MPS November 21, 2017 at 11:25 pm

It would stand to reason that government workers are more talented than their private sector peers. Is that widely acknowledged?

34 clockwork_prior November 19, 2017 at 3:15 am

‘The federal government, however, can offer the worker $125k in nominal salary’

Yet again, time to link to an explanation of the GS pay scale – https://en.wikipedia.org/wiki/General_Schedule_%28US_civil_service_pay_scale%29

The only people ‘offered’ $125k in salary are GS-15s, steps 8-10. And to imagine that the federal government gets 25k of that back seems hard to imagine in most cases.

The broader point seems to completely ignore non-profits. Let us say that someone is paid $125k a year at a public policy institute to publish what is called research (some easily get double that, according to their IRS 990 filings – https://www.citizenaudit.org/ ) from money that was donated. And such donations reduce tax income. Depending on just how well a donor takes advantage of tax laws, to a considerable degree which means that the tax not being paid due to the donation may be considerably higher than the tax received from the salary of the non-profit employee.

Linking to concrete examples is unnecessary here, as this web site seemingly prefers hypothetical discussions compared to those using actual data.

Nonetheless, a non-profit also knows that much of the money it receives is not taxed (again, we will keep this theoretical, as compared to empirical when talking about how to structure planned giving opportunities which can both reduce paid tax through the donation while also generating tax free income for the donor over decades, for example), though of course, many non-profits pay even worse than the GS scale, with distinctly inferior benefits.

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35 TMC November 19, 2017 at 12:41 pm

A 13 step 10 can get 125K, in Houston.

Why is Houston the top income adjustment? Even more than DC or LA? Houston is pretty cheap to live in comparatively.

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36 TMC November 19, 2017 at 12:43 pm

Nice deception. “rest of the US” is a 15% adjustment. The whole grid has a 15% discount built into it.

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37 Ivo November 19, 2017 at 5:04 am

‘The government’ hiring the worker and ‘the government’ receiving the taxes are not the same thing. The former one does not benefit from, and is hence not motivated by, benefits to the latter one. Also, in the former we are dealing with individuals making hiring decisions, while the latter is an abstract entity. So it seems to me this argument is based on false equivocation.

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38 David Pinto November 19, 2017 at 7:12 am

When I was young my mother took a job as a school crossing guard. At the time I thought it was odd that she was paying property tax to the city when they were paying her. Why not just credit her property tax? The result would be the same.

Then again, my mother and aunt would give each other $20 as a birthday gift. (Their birthdays were 25 days apart.)

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39 rayward November 19, 2017 at 7:21 am

Here is an unrelated topic, but part of the general topic of tax incidence. As the result of the employment tax increase adopted during the Reagan administration, the government has collected about $2.6 trillion more in payroll taxes than it has spent on benefits. Is the excess sitting in a bank somewhere? No, it’s all been spent, on wars, farm subsidies, you name it. The payroll tax increase was combined with a large income tax cut, and another, and another, and soon enough, another. Didn’t the payroll tax increase serve to partially offset the income tax cuts, the latter mostly benefiting persons of high income whereas the payroll tax hits low and middle income working Americans? Doesn’t this mean that the Reagan payroll tax increase has been doubly distortive? Not only did it discourage employment by creating a much higher tax on what employers pay to workers, it also distorted the composition of taxes, higher regressive payroll taxes and much lower progressive income taxes.

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40 John Thacker November 19, 2017 at 7:28 am

One way that I’d partially dispute it is to note that the federal government is not a monolith, and different divisions and departments fight for money. “Money to general revenue” is not quite the same as “extra money in the division’s budget.” The same thing in reverse is part of why federal agencies don’t try to save money, as (partially thanks to the 1974 Budget and Impoundment Control Act) money saved by an agency goes into general revenue and really means less money in that agency’s budget next year, because they “obviously didn’t need it.”

In other words, that the Federal Department of Transportation encouraged transit leaseback deals (which directly deprived the federal government of money) while the Treasury Department objected is at least some evidence that the transfer isn’t quite as pure as depicted here.

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41 Millian November 19, 2017 at 8:22 am

The formal and structural response is: there are different parts of government and very few work for the IRS, while other departments’ and agencies’ budgets are determined inclusive of income tax on labour. Even simplifying to (1) a single employer called Government, (2) which can freely determine both the value of applicants’ labour and hours worked in any contract and, and (3) which faces no negative consequences from crowding out private-sector taxes, if the private sector pays this worker net 80k, why wouldn’t the government also pay net 80k?

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42 Millian November 19, 2017 at 8:32 am

Imagine if taxes rose 5%. Surely government employment will not go down among existing workers, and surely the outside options will not have improved, whether private-sector jobs or early retirement. So it seems like government workers will bear the incidence of the tax change.

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43 Bill November 19, 2017 at 10:32 am

The argument that federal employees pay no federal taxes should make

Grover Nordquist happy.

Carried to its logical conclusion,

We should all be federal employees and we would all be better off.

Reductio ad absurdem answers this argument.

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44 Toby November 19, 2017 at 10:40 am

But why would the government pay 125k if they can get the same workers by paying 100k?

Let’s run with the assumption that workers and production functions are identical. Public sector and private sector output are perfect substitutes. The only difference is that taxes are used to pay for the former and prices for the latter.

Why would the government then offer more than a 100k when the private sector isn’t willing to? Minimizing production costs and DWL of taxation is consistent with the government not offering more than the private sector.

Of course it could but that would be inefficient. If crowding out happens then it happens because the government doesn’t minimize production costs and DWL costs.

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45 Toby November 19, 2017 at 10:50 am

Not perfect but imperfect substitutes (convex preferences)*. Otherwise there would be no government.

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46 Andy November 19, 2017 at 11:05 am

..but the government receives taxes wherever they’re earned, so this only holds as relevant in cases where the government truly “creates” a job. At full employment this situation would not exist.

At less than full employment it’s not obvious to what extent this exists. One might guess that the 100,000 employee who is now in the private sector causes the next-best guy to take a 95,000 job (rather than 100k), and on down until that 100k government job opens up a 20k job for someone who doesn’t have one – and the government’s cut is Taxes on the 20k plus he aggregate difference in pay at all stages.

But in either case the government seems to be sufficiently compartmentalized and the tax dollars sufficiently spread out it that the people setting making hiring decisions would only see extremely diffuse benefits from bringing more money into the treasury. Also, how many people are out there saying they made 25% more by working with the government?

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47 Scott Sumner November 19, 2017 at 11:12 am

Lots of people are overthinking this. The government only gets extra revenue if the hiring causes GDP to rise. That’s the issue. And GDP rises in the steady state only in the most primitive Keynesian model. In any NK model with a natural rate of output there is no effect on steady state GDP.

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48 Toby November 19, 2017 at 11:25 am

Scott, isn’t the question whether (labor) taxes are doubly distortive because the government also hires employees?

My answer to that question is that the taxes themselves aren’t doubly distortive. The second distortion only exists when the government doesn’t minimize DWL of taxation and production costs. If government’s do minimize DWL and production costs, then they will not offer more than the private sector.

Your answer seems to be that unless GDP rises by paying government employees more the government will not do so, and therefore the second distortion isn’t there. Is this correct?

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49 Toby November 19, 2017 at 11:25 am

Meaning that your answer is the same as my answer essentially?

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50 Liberty November 19, 2017 at 12:11 pm

So many comments, so few that see the obvious problem with the reasoning. “The government” is not one big monolith. The department hiring is not going to see that tax money. They can’t calculate that in as if it’s direct revenue to them the extra tax money goes into a pile that Congress (ways and means committee voting on a bill created by the President and Party and lots of horse trades) will have to vote and decide how to spend it. As far as the public sector employer is concerned the taxes paid are gone just as surely as if they were private sector.

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51 curmudgeonly troll November 19, 2017 at 12:40 pm

I don’t get it. Any income tax where the incidence falls on the employer is not paid by the employee. If you tax grad students, the university has to make up the difference. Yeah, the grad student doesn’t ‘pay tax’ in that sense, even if they fill out a 1040 and write a check. So what? You can’t wring blood from a stone. Tons of low-wage workers don’t pay taxes in that sense, nothing ‘distortive’ about it.

Then if you want to call the income taxes on Federal workers distortive, you need a model of how the government hires and determines how to pay wages, how many to hire, and whether/why those decisions are different from the private sector. Government wages are compressed, they probably pay more than market at the low end and less at the high end. I don’t really know why, would have to fall back on behavioral economics, some kind of compensating differential. There’s probably some distortion but the ‘tax’ tells you nothing without a model of how hiring responds to the tax.

Seems like very very fuzzy thinking but maybe I’m missing something.

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52 rayward November 19, 2017 at 6:47 pm

Of course, at this blog, the government can do no right and the private sector can do no wrong. Sumner suggests that, except for the Keynesian effect, government is a net negative. Should we turn all government functions over to the private sector? How about defense? Or the state department? Or responses to natural disasters? What about public-private partnerships, where the government pays the costs and the private sector reaps the profits? Indeed, a very large public-private partnership is on the horizon. Which one is that? Autonomous vehicles. I thought autonomous vehicles were strictly a private enterprise project? Really! Who will develop and pay the cost for the separate right of way that autonomous vehicles will need to make autonomous vehicles a safe alternative? Who says autonomous vehicles need separate right of way? The Google engineers in a gaffe not repeated here. Can one imagine Donald Trump and Elon Musk with the keys to the treasury.

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53 JFA November 19, 2017 at 7:14 pm

Change the example to a classic coal mining town where the houses are owned by the company and the company store is the only grocer. Start from there.

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54 liberalarts November 19, 2017 at 9:54 pm

This is a great example of flawed partial equilibrium thinking, when the general equilibrium is confusing but what is necessary to determine this. In the general equilibrium, an efficient government (per Diamond and Mirrlees famous 1971 AER result) needs to maintain productive efficiency even in a 2nd best taxation world. Implied is that there is no gain for society to allocate resources inefficiently via taxation powers and a loss will occur. In thought experiments like this, one has to assume that the government is operating to increase productivity through its hiring of labor. One can credibly argue that point, but assuming irrationality or corruption means giving up on basic efficiency modeling anyway.

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55 john November 20, 2017 at 12:51 pm

But would need to be adjusted for the observation that government employees seem to cheat on the taxes (don’t pay) at a higher rate than their private counter part does. Or at least that has been some of the news reports over that past several years I think.

And if the implicit agreement is “we’ll pay your taxes for you if you work for us cus we that that money anyhow” does that simply setup the culture that paying any of the taxes is no necessary so the wages that were to cover the market-income taxes simply get kept so the government is out the taxes twice? (in the extreme — clearly we find a solution somewhere inside).

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56 spencer November 20, 2017 at 2:21 pm

Look at the idea from a different perspective.

Can GM, Ford and Chrysler pay their employees more because they know that the employee will spend part of their income to buy cars from their employer?

They are likely to buy their car from the firm they work for because the firms offer their employee a generous employee discount. This is in addition to the social pressure to buy the car of the firm you work for.

What is the difference in this line of analysis from the one proposed for government employees?

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57 JonFraz November 21, 2017 at 1:48 pm

The Federal Government has not crowded out other employers.

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58 Phil Nuetzel November 27, 2017 at 9:33 pm

I think the following comparison is helpful. Perhaps I’m overlooking some deeper issue:
Government pays $10 wage and gets $2 back. Net cost $8.
Private firm pays $10 wage and (assuming it faces the same tax rate as workers) gets a tax deduction worth $2 in taxes avoided. Net cost: $8.
The firm must be profitable to benefit from the deduction, but otherwise it’s even when tax rates are even.
Same considerations would seem to apply to government contracts versus private contracts. Profits earned on contract are taxed by government, so it takes it’s “discount”, but a private payer would get a deduction and shield some profit from tax. Should net out the same.

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