Tax Policy

Cato Inst. Study: Hidden Taxes (SUMMARY) (TEXT)

Most workers are aware that the federal government takes a substantial chunk of their pay each month through taxes that are listed on their pay slip. But few realize the impact of hidden taxes that are not listed.

An average full-time manufacturing worker earns a gross annual income of $27,200. However:

  • The worker costs his employer roughly $31,000 when workers' compensation premiums, unemployment insurance taxes, and the employer's share of the FICA payroll tax are included -- money which would otherwise have gone to the employee.

  • The $31,000 price tag doesn't include fringe benefits, tax and regulatory compliance.

  • When income and payroll taxes are withheld, the worker receives only about $22,400 in take-home pay.

  • So the "tax wedge" for this worker is about $8,600 -- 28 percent of the amount the employer pays to keep him on the payroll.

That does not include a host of additional taxes the worker faces -- property taxes, sales taxes, gasoline taxes, cigarette taxes, and so forth.

For employees earning $60,000 a year, the tax bite rises to 36 cents on the dollar. Nearly half of that amount doesn't appear anywhere on the pay stub.

The Mackinac Center for Public Policy in Michigan has devised a Right to Know Payroll Form and is encouraging employers to use it to demonstrate to workers just how expensive government is to them. It itemizes on workers' pay stubs each and every one of the costs imposed by government tax and regulatory policies.

Sources: Dean Stansel, "The Hidden Burden of Taxation: How the Government Reduces Take-Home Pay," Policy Analysis No. 302, April 15, 1998 Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001, (202) 842-0200; and "Concealed Pay Bites," Washington Times, April 14, 1998.

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