Our grandparents have always told us exactly the same thing economists tell us: TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). Walter Williams–brilliant and concise as usual–explains as much in his weekly column. The example he uses is the myth that your employer pays half of your Social Security tax:
The vision of getting something for nothing, or getting something that someone else has to pay for, explains why so many Americans are duped by politicians. A congressional hoax that’s flourished for seven decades is the Social Security hoax that half of the Social Security tax (6.2 percent) is paid by employers, the other half (6.2 percent) paid by employees. The law says that if you are self-employed, you get to pay both halves. The fact of the matter is whether you’re self-employed or not, you pay both halves of the Social Security tax that totals 12.4 percent. Let’s look at it.
Suppose you hire me and our agreed-upon weekly salary is $500. From that $500, you’re going to deduct $31 as my share of the Social Security tax and you’re going to add $31 as the so-called employer’s share, sending a total of $62 to the IRS. Here’s the question: What is the weekly cost for you to hire me? I hope you answered $531.
The next question is: In order to make hiring me profitable, what must be the minimum dollar value of my contribution to your total output? If you said $531, go to the head of the class because if the value of my contribution to total output is only our agreed-upon salary of $500, you’re making losses hiring me and you’re going to be out of business soon. Therefore, if I am producing $531 worth of value per week, it is I who’s paying the so-called employer as well as the employee share. The reason why Congress created the fiction of the employer share was to deceive us into thinking that we’re paying fewer taxes than we in fact are.
If you’re self-employed, you understand that this also applies to income tax. If you work for a firm, your employer pays payroll tax that you never see deducted from your paycheck. Self-employed folks pay self-employment tax in addition to income tax, to make up for the fact that they don’t have a payroll.
This method of taxation is Congress’s most brilliant scheme for cheating us out of our hard-earned, dearly-needed cash. We never actually send money to the gov’t–it’s deducted for us–and what we see on our pay stub is not even the true tax burden.