Government's Hidden Bite out of Michiganians' Take-Home Pay

Are you finding it difficult to make ends meet? Do your pay raises seem to disappear by the time they show up in your paycheck? Do you find yourself in a constant race to keep ahead of the government's claim on your earnings so you can meet your family's needs? If so, read on and you'll discover what some citizens are doing to inform others of the real cost of government.

After you finished filling out your income tax forms last April, you probably thought you knew all about the taxes you pay. Think again. In addition to the amounts itemized on your pay stub and W-2 form, government snatches a substantial sum from your employer for taxes he must pay on your behalf. That's money you never see that could have gone to you in take-home pay. Compared to those in the other 49 states, taxpayers in Michigan get hit especially hard.

Workers' compensation premiums, unemployment insurance taxes, and the employer share of the FICA payroll tax are real costs that your employer must pay to government-over and above your wages and salary-to keep you on the payroll. Those three hidden levies consume almost as much as is already withheld from your paycheck for income taxes and the employee share of the FICA payroll tax.

For example, say you're a worker earning the average manufacturing wage. Over the period of a year, those hidden taxes add up to an additional $4,200 that your employer must pay to keep you on the payroll. But you won't receive one penny of that amount. The government takes it all without even giving you any notice that it has done so. That is the essence of our hidden burden of taxation.

Recent studies maintain that, even though the economy appears to be doing well, workers' real wages have been stagnant. But few of the studies have acknowledged that hidden taxes and government mandates on employers have been growing unchecked. Employers are finding it ever more expensive to keep workers on the payroll, but the increasing sums they have to pay aren't going to the workers. Instead, that money is going to government.

The growing "tax wedge" between how much employers pay to keep their workers on the payroll and how much those workers receive in take-home pay is, in effect, crowding out take-home pay. That's why earnings for many people have been stagnant.

Here are the numbers for Michigan from my recent Cato Institute study on the ever-expanding tax wedge:

  • The average full-time manufacturing wage worker earns a gross income of $27,200.

  • When workers' compensation premiums, unemployment insurance taxes, and the employer share of the FICA payroll tax are included, that worker costs his employer roughly $31,400. (And that still does not include the costs of fringe benefits and tax and regulatory compliance.)

  • After income and payroll taxes are withheld, that worker receives only about $22,200, ranking Michigan 38th in take-home pay.

  • The tax wedge for an average manufacturing wage worker in Michigan is almost $9,200 ($31,400 minus $22,200), eighth highest in the nation. (That does not include the host of additional taxes-property taxes, sales taxes, gas taxes, excise taxes, and so on-that workers must pay out of their remaining take-home pay.)

  • The tax wedge consumes 29 percent of the amount employers pay to keep each worker on the payroll.

  • Nearly half of the tax wedge is hidden from the worker because it comes from taxes paid directly by the employer on the worker's behalf.

So, if you are an average manufacturing wage worker in Michigan, more than a quarter of every dollar that your employer must pay to keep you on the payroll goes to government, rather than to you in take-home pay. If you're earning a salary of $60,000, the tax wedge rises to 37 cents on the dollar. Nearly half of that amount doesn't appear anywhere on your pay stub.

One way to address the problem of hidden taxation is to eliminate income and payroll taxes. Replacing those taxes with a national sales tax, paid directly by consumers every time they make a purchase, would make the burden of taxation much more visible.

Short of such fundamental tax reform, repealing the deceptive practice of tax withholding and encouraging employers to adopt the informative "Right to Know Payroll Form" would also increase the visibility of our tax burden. First introduced by the Mackinac Center for Public Policy in Michigan, the Right to Know Payroll Form itemizes on workers' pay stubs many of the costs imposed by government tax and regulatory policies. Dozens of companies have adopted the Form and the State of Michigan implemented a version of it for 60,000 state employees in 1996. Michigan Congressman Pete Hoekstra introduced legislation recently to put the Mackinac Center's Right To Know Payroll Form in place for federal employees.

When it comes to the cost of government, what you don't know does indeed hurt you. Until we remove the veil of secrecy and bring hidden taxes out into the open, government will continue to take a larger and larger bite out of your take-home pay.