Why are some wage taxes officially paid by the employer, even though they're really paid by the employee?

Question

My current salary is taxed at two levels: first, the employer has to pay a certain number of taxes on my wages. The rest of the money is then considered to be my salary and I pay other taxes (social security, medical insurance, income tax) from it. My real tax burden is around 47%, while my "visible" tax burden is 28%.

Why is the current system in place? Wouldn't it make more sense for employees to pay 100% of the taxes they own to the government, rather than pretending the employer owns some of them?

I live in Czech Republic, but I assume the same system exists in other European countries.

Answer 1

(Note that in all European countries I know, the payments you are referring to are not really taxes – flowing to the state budget – but tax-like contributions to mandatory insurance systems, which is why I will mostly use the word “contributions” to refer to them.)

Arguably, the notion that employees “really” pay those taxes and contributions does not fully make sense. You might just as well consider that employers have to pay whatever wage result in a take-home pay that allows them to recruit workers that are good enough for their purpose and therefore that they are the ones “really” paying all taxes (together with the part of the wage that employees get as take-home pay). Who says that if these taxes and mandatory contributions were lower you would get all the difference as extra cash on hand and employers would continue to pay the exact same labour costs? In principle, employers might also pocket the difference, without changing their employees' take-home pay.

Whatever the case may be, it's true that both employers' and employees' mandatory contributions should in principle have the same effect, economically speaking. Certainly from a market perspective, employers would be expected to hire employees only if the marginal cost of one employee (that's take-home pay, “visible” and “invisible” income tax and mandatory contributions and all other costs) are lower than the increase in production they need to turn a profit from the product of that employee's work. If labour costs go up, it does not matter whether it's in the form of increased salary or additional employer contributions, it will be less profitable to hire someone and might price some workers and/or businesses out of the market.

Conversely and with the caveat that payments to mandatory insurance systems are really deferred income (and therefore that reduced benefits might need to be compensated through additional pay), employees who are ready to work for a certain take-home pay should still be ready to do it for the exact same price if all the “invisible taxes” would disappear overnight.

The reason why the distinction does matter is that wages (very much including the minimal wage) are defined before taxes but after employers' mandatory contributions in work contracts, collective bargaining agreements and the law. This means that when a government decides to raise the rate of the employers' contributions, they will increase labour costs, risk increased unemployment or the wrath of employers but not the discontent of workers who won't see any change to their take-home pay. Conversely, when it's the employees' contributions that increase, people will see their take-home pay decrease (or more often stall), while employers won't see any changes, at least in the short-term (i.e. before people switch jobs and negotiate other contracts, giving everybody an opportunity to adjust the wages they are willing to pay or receive to the new economic conditions). And if you do both at the same time, you can always go on TV to argue that “everybody has to pay their fair share” and hope for some psychological effect.

Answer 2

They Aren't

Part of the answer is that your premise is incorrect - employers do not pay part of an employee's tax burden. KPMG (one of the largest auditing firms in the world and a prestigious member of the 'Big Four') have published a guide to Czech taxes. To summarize that guide:

• The Czech Republic has several social and health insurance taxes.
• Each program requires a tax both on the individual and the employer.
• The individual pays a portion of their income.
• The employer is also taxed based on the employee's income.

Example

Let's use health insurance as an example. Our fictional person will have been paid €1.000 in some period.

• Their pay was €1.000.
• Their employer is taxed 9% of that amount, or €90.
• That €90 is also a form of income, so the employee's taxable income for this period (for the purposes of health insurance) is €1.090.
• The employee is taxed at 4,5% of this taxable income, which is €49,05.

To address a concern from the comments on another answer - this is the way the tax is structured. Of course a person may interpret this a variety of ways based on their own evaluation.

Accounting vs Economic Cost

There is something of a "question behind the question" here. Certainly in an overt sense the only tax burden on an employee is their share of the social and health insurance costs; the employer's burden is irrelevant. This is the accounting cost: the amount that you actually pay.

However, you might also be interested in the economic cost. Economic cost includes less direct (and less easily measured) elements. For example, if an employer offers lower salaries to compensate for the extra cost of the health insurance program, than the lost wages are an economic cost (but not accounting cost) to the employee.

Answer 3

While the taxes and wages are competing costs within any cost structure of an enterprise, that is not what makes taxes paid by employers different from taxes paid by employees.

Rather who "pays" these taxes is determined by whose liability they are. "Liability" is an existing debt. If the debt is not paid, a court can be asked to order a payment. This can result in government seizing most forms of property (building, bank accounts, etc.)

Having an entity such as an employer owe the debt is considered more secure than having individual employees (whose financial stability is likely to be less viable). Enterprises, on average, have more ability to raise funds to satisfy debts than do employees. For example, larger employers have easier time raising money through financial markets.

Answer 4

You have a wage, say X. The employer has to pay taxes, insurance and so on for hiring you, based on the wage X. Nothing is removed from the wage at that point. Then you have to pay taxes and insurance based on your wage, that is subtracted from your wage.

Of course this has the effect that the cost of your employer equals your wage, plus employer taxes. And the money in your pocket is your wage, minus employee taxes. Where this is important is when employer taxes change (the employer's cost of hiring you changes, your wage and the money in your pocket don't change), or when employee taxes change (the employer's cost of hiring you is unchanged, your wage is unchanged, but your taxes and the money in your pocket change).

So your real tax burden is the employee's taxes that you pay. What the employer pays is none of your business. When you look for a job, you look for your wages - your employer should know that your wage isn't your cost, but you don't care. In the UK, the employer's tax burden for hiring you can change with your circumstances, for example age, because the government wants to encourage companies to hire people needing more experience. That doesn't affect your wages.

Now if your employer has a budget X to hire someone, they can easily calculate what wage they can offer. They should know that there is extra cost for them. But that's not just the employer's taxes, it's also office space, computer equipment and all that.

PS. There is one situation I know of where a UK employer gets some rebate - I think they don't have to pay the first £4,000 or so of employer NI contributions. With a single employer, they save £4,000 per employee. With ten employees, they save $400 per employee. Now how would you look at that if you claimed all taxes were paid by the employee? The employee would get less money if another employee gets hired?

Answer 5

Having taxes be placed on companies and individuals in different ways allows for tax policy to change where the burden falls or at least appears to fall when it is initially implemented. As described gnasher729's answer it allows governments to raise taxes without affecting take home pay, at least until the next pay review.

It also allows for specific exemptions and the creation of tax avoidance loopholes.

1.

You can claim Employment Allowance if you’re a business or charity (including community amateur sports clubs) and your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

HMRC warned against this kind of arrangement in 2015, saying schemes designed to exploit the Employment Allowance “simply did not work”. But recent evidence suggests that the practice is fairly widespread....

A recent BBC investigation found that around 48,000 mini umbrella companies have been created in the UK in the last five years.

Answer 6

These tax systems are implemented, so that the employees pay a part of their wage and the employer pays taxes on top of the wage, as an example: You earn 100$, taxing is 10% is on you and 5% on your employer. that means you get 90$ after tax and your employer is paying 105$ for your work.

Now you can say that basicly your employer pays you 105$ and you pay 14,3% in taxes, but that assumes that, as soon as the 5% on your employer disappear, you will get the 5$, which I can assure you won't happen.

And here is the actual difference: If the tax on your wage gets smaller, usually you don't gain anything, since the state has to ether take the losses from somewhere else by for example rising sales taxes, or by reducing public services.

But if they reduce the taxes on your employers side, you will loose, because you won't get more or just a very little bit more out of the lower tax rate, but again, the state has to rebalance their budged by ether taking more from you or reducing costs on services. And don't believe that in this day and age the state will take from your employer.