NCPA - National Center for Policy Analysis


March 18, 2005

About 37 percent of the federal tax burden is hidden from the general public's view. As a result, voters underestimate the price they pay for government programs and thus have a tendency to demand higher government spending. This phenomenon is called "fiscal illusion," says economist Chris Edwards of the Cato Institute.

The two biggest hidden taxes are:

  • The employer half of the 15.3 percent payroll tax, which funds Social Security and Medicare; this $372 billion tax is not reported on worker pay stubs but ultimately falls on workers in the form of reduced wages.
  • The $230 billion corporate income tax; again, this tax is passed onto individuals through the form of higher prices, lower wages or reduced investment returns.

Other federal taxes that are hidden from view include import duties, unemployment insurance taxes, and excise taxes on gasoline, alcohol and tobacco. In aggregate, these hidden taxes amount to some $140 billion.

Edwards says a good first step to reducing the fiscal illusion is for employers to disclose the entire payroll tax paid for each worker on annual income tax W-2 forms mailed to employees.

Source: Chris Edwards, "Options for Tax Reform," Policy Analysis No. 536, Cato Institute, February 24, 2005.

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