Employee payroll taxes
The economy is an interdependent system in which all prices are related to each other. Changes in the price and quantity of one factor may affect the substitutes or complements of that factor . This is to say that, within the logic of competitive market model, on which side of labor market, the tax is imposed is based on interdependence. But markets are not perfect and this reasoning stands in contrast to attitudes taken in the political debate over pay roll tax policy. This policy provides the source of revenue for the social security system . Let us try to make a clear idea on the pay roll tax . The portion of social security and Medicare taxes withheld from employee s wages along with an additional contribution of social security made by the employer are frequently known as payroll taxes. Its role principally should be seen in relation to the benefit payments . This generally refers to two kinds of taxes .
1. Withholding which employers are required to withhold state and federal income taxes as well as social security and Medicare taxes from employees wages or the taxes that are directly related to employing a worker paid from the employer s. This may proportionally linked to an employees pay. This tax is mainly applies to the personal earnings only and not to capital income .
The FICA which includes the social security and Medicare taxes must also be withheld from the employee s wages and an employer must have to pay a matching amount of FICA for their employees . At present. The social security rate is 6.2% and therefore as an employee, he must have to withhold 6 .2% from their wages for social security taxes and at the same time the employer must have to pay a matching amount in social security taxes until the employee reaches the wage base for the said year . Considering the statistics, for the social security tax, the wage tax base for the employee in 2001 was $80,400, it was $87000, $87900, $90000 in the respective years : 2003, 2004 and 2005.It further increased to$ 94200 in 2006 and presently, it is recorded as $ 97500 in 2007.
justify">The Medicare tax rate, at present is 2 .9% for both employer and the employees as well. Unlike the social security tax structure, there is no utmost wage base for the Medicare portion of the FICA tax . In this case, the employer must withhold 1.45% of an employees wages and pay a matching amount for the same .
Next we consider the payroll tax system for some of the countries :
USA, the employers are required to withhold the federal tax, along with this half of social security tax and with that, half of the Medicare tax. In some places, the employer may also require to withhold state income tax, the city income tax or even the state and federal unemployment tax .
In UK, there are two kinds of payroll taxes. First kind of payroll tax is the income tax for employees and Employees National Insurance Contributions and the second kind of payroll tax is the same as above, but that of for the employers .
In Australia the payroll tax is paid to the individual states and territories and only by the employers but not by the employees and the Australian Government itself only requires one tax withheld from pay checks, the PAYG tax which includes the Medicare levies .
Given a perfectly competitive market, whether tax is imposed on either buyer or seller, is a matter if indifference. The same rule is also held in the factor market. Therefore, given a perfectly competitive labor market, the division of pay roll tax between employer and employee is a fiction but outcome being the same . As a matter of legislative intent, this sharing provision was introduced to divide the tax burden. But these arise a question of whether the employers half was meant to a fall on profits or not . The answer is, in a real world, markets are not perfect. If pay roll taxes are increased, unions may accept n increase in the employer contribution . Employers in turn will not absorbed the increase in their contribution in reduced profits but will make it an occasion to raise administered prices. However, in short run a change in employer contribution will not be reflected in the wage rate because wage contracts extended over several years or having an adjustment lag . But even in the long run, the competitive market outcome may not apply where imperfections prevails.
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