Economic Burden of FICA Tax Case (Case Study Sample)

Economic Burden of the FICA Tax Case Study Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Day, Month, Year Outline * Introduction * Discussion * The bearers of the economic burden * The tax incidence approach and economic principles * Shift of economic burden in relation to unemployment changes * Effects of different taxation methods * Conclusion Introduction Governments usually require taxes in order to meet expenses such as healthcare, security, and other public requirements. To raise the revenue, the government imposes taxes on goods and services as well as on the wages and salaries that employers and employees earn. In essence, payroll tax, such as Federal Insurance Contributions Act (FICA), is a form of tax imposed on the wages that employees receive from a given firm. The tax appears as a deduction on the employee’s gross salary or wages. To minimize the effects of the tax on the employees, the government can at times impose laws that compel the employers to pay half of the tax. As a result, the employers pay half of the tax and the employees experience minimal deductions from their payrolls, which represent half of the total payroll tax. Presently, the payroll tax in the United States is 7.65% for the workers and the employers. It is within this context that the study explains the bearers of the economic burden of the payrolls and analyses the effect of the economic burden shift that can result from a shift in unemployment. Discussion The bearers of the economic burden resulting from payroll tax are both the firms and the workers. Notably, payroll tax aims to raise government revenues by deducting the amount of money that employees receive from firms. The implication of the deduction is increased wages and salaries by respective firms in order to minimize the effect of deductions on the employee’s net pay (Rubin, 2007). Consequently, the employees earn little pay as opposed to the actual gross salary or wage. When employees receive little pay and employers pays high salaries and wages due to payroll taxes, the implication is reluctance from employers to hire new employees and a reduced demand from employees to look for jobs. As such, several students or individuals, who would opt for part time or temporary jobs, demonstrate low demand. Since the workers and firms are subject of payroll taxes, reduced employment leads to minimal taxes, and thus, the company and the workers end up sharing the economic burden of payroll tax. The tax incidence approach explains the distribution of tax among individuals, who dictate the economy. Therefore, since firms and workers are subject to payroll taxes they dictate the economy. According to Hyman (2013), when the employee net pay drops because of the payroll tax, the demand for labor decreases. On the other hand, since payroll tax compels firms to increase the amount of wages or salaries that they pay to their workers, they become reluctant to hire additional workers. This reluctance is evident in goods and services which are subject to taxes and price controls. Taxes, which tend to increase the price of a product initiates reduced demand from buyers, whereas taxes or regulations that compel sellers to reduce the price of products create high demand from potential buyers. In the context of workers and firms, workers can represent goods, whereas firms represent buyers and the wages or salaries can represent the price. In relation to the economic principles, a price increase leads to decreased demand for the product and minimal sales, whereas a reduction in price occasions an increase in demand. Fundamentally, the shift in the economic burden when the rate of unemployment changes from 9% to 5% is minimal since the amount of taxes is effective on individual payrolls. Boeri and Ours (2008) assert that when unemployment rates change, the amount of revenues that the government earns increase. Increased amount of revenue transpire because of increased number of individuals working in various firms. These individuals pay their taxes, and in turn, boost the amount of revenues that a particular government receives. Conversely, the economic burden does not demonstrate a pronounced change. The minimal change in economic burden is because the amount of salaries and wages paid by a firm increases, while the amount of workers, who remit taxes rises. It is imperative to understand regardless of the increased rates of employment, which can shift from 9% to 5%, the amount of wages or salaries paid by firms and earned by the employees will not display a major change. Evidently, taxation of payroll taxes on firms, workers or its division between firms and workers cannot create a substantial impact on the economic burden. In relation to the economic principles, when the price of a commodity increases due to taxation, its demand goes down. Therefore, by imposing payroll tax exclusively on firms, the government subjects them to a lot of pressure, which can result in reduced wages and salaries. In addition, the firms become reluctant to hire new employees as the tax affects their willingness to hire. Goerke (2002) explains that high tax imposed on firms lead to high rates of unemployment and low wages or salaries especially for those employees, who work in the technical departments. Reduced wages and salaries occasion as the firms attempt to pay the additional taxes imposed on them. When salaries reduce, demand for labor decreases because several employees may not like to work and receive low wages or salaries. As such, the labor market experiences scarcity in the quantity of labor ...