Thursday, September 25, 2008

Common Tax Misconception

A.) Windfall Profits Tax on Oil
B.) Corporate Tax
C.) Employer's Portion of FICA Tax

What do all three of these taxes on businesses have in common?

Hint: Politicians favoring these taxes would never admit to this fact.

Answer in comments section.


Zachary Piso said...

I give up (because this is way out of my expertise and shouldn't have been the one that had to guess).


Tim Moreland said...

Okay, well all of these taxes are sold by politicians as "taxes on the rich." According to politicians, windfall profits are paid by the oil producers, corporate tax by corporations, and employer's portion of FICA by employers. Yet, this is not true.

A windfall profits tax discourages the production of oil. This in turn lowers supply and raises the cost of oil for consumers.

Since corporations are extremely mobile in today's globalized world, research shows that 70% of the corporate tax ends up being paid indirectly by employees, with only 30% being paid by corporations.

Finally, the employer's FICA tax is probably the most "clever" of the three. When an employer decides to hire an employee, he determines what the cost will be to hire him versus what the benefit will be from hiring him. To an employer, the cost equals (roughly) the wage plus additional taxes. If the FICA tax was equal to zero, then the employer would be willing to pay $7.00, for example. However, if the FICA tax was at 10% for employers, the employer would be willing to pay the employee $7.00 minus the 10% tax. Thus, the FICA tax "paid by employers" ends up resulting in lower wages to the employee.

So, the next time you hear a politician selling a tax as one "the common man" will not have to pay for, get out your paycheck.