If Americans want to reclaim liberty in this age of governmental whole-life management, one thing we must do is take the trouble to understand how government makes us work for its priorities and programs. The price of having a job today is working for the government, just as the price of doing business, for an entrepreneur, is giving the first portion of his earnings to the government.
Many readers will be familiar with the point that we Americans work, on average, until sometime in April each year to pay our taxes at the federal, state, and local levels. In this formulation, it is only after “Tax Freedom Day” that we start working for ourselves, and not for the government. Tax Freedom Day delineates the amount of time we spend working each year to pay our federal and state income taxes, our capital gains taxes, our Social Security and Medicare contributions, our property taxes, other state taxes like auto license fees, and our various federal, state, and local sales taxes (including gas taxes and other special sales taxes).
In 2013, according to the Tax Foundation, Tax Freedom Day was on 18 April.
For the average household with a family of four in February 2013, the bill comes to 29% of a median income of $51,404, which works out to $15,210. In some states, your tax bill is higher and your Tax Freedom Day occurs later in the year (e.g., in New York, where it was 6 May this year). In other states, Tax Freedom Day is earlier (e.g., in Oklahoma, where it was 6 April). $51,404 minus $15,210 is $36,194.
(Because we will be comparing California and Texas throughout this post, I will calculate the Tax Freedom Day remainder for both. This is the amount reflected in the graphic. Texas’ Tax Freedom Day this year is 10 April, which yields a tax total of $12,676. The Texas median-income taxpayer thus keeps $38,728 after taxes. California’s Tax Freedom Day is 24 April. With a tax total of $16,053, the median-income taxpayer there keeps $35,350 after taxes.)
These forthright taxes represent a big chunk of the value of your work product. You could work only eight and a half months per year and have the same amount to live on, if you didn’t have to pay what you pay in direct taxes.
But Tax Freedom Day is actually just the visible manifestation of a more insidious government raid on your employment conditions. Here’s how it works. You are able to get a job because an employer needs work done, and the value of that work to him equals everything he must spend to employ you. Your salary – the number that’s used to calculate your state and federal income taxes and your Social Security and Medicare contributions – represents only one portion of the total amount your employee has to spend to employ you. He doesn’t just spend the $51,404 that you see as your “income.” To employ you, he has to spend more than that.
Payroll costs to the employer
To begin with, the employer matches your contributions to Social Security and Medicare. During the recent period when the employee contribution to Social Security was reduced to 4.2% (that reduction was ended in December 2012), the employer still paid the full employer-contribution rate of 6.2%. In 2013, the employer rate for Social Security is 6.2%, and for Medicare is 1.45%.
In our median-income example, on an income of $51,404, the total employer contribution to Social Security and Medicare is $3,932. That means the cost of employing you is $55,336.
The employer also makes a federal unemployment contribution and a state unemployment contribution for each employee. The federal unemployment tax (FUTA) is an effective rate of 0.8% on the first $7,000 of wages per year – except in certain states (like California) where the effective rate is 1.2% of the first $7,000 of wages. (The reason for the “effective” rate is that there is a federal business tax deduction for the employer that offsets some of the FUTA. California’s effective rate is higher because California employers don’t get the same tax credit from the feds. This is because of the state’s debt position with the federal government.) We will have to start comparing at least two states from this point on, so we will use the California effective rate of 1.2% for one example, and the effective rate in Texas – the average 0.8% — for the other.
The California FUTA is thus $84. The Texas FUTA is $56. The total cost of employing the median-income worker is thus $55,418 in California and $55,390 in Texas.
The state unemployment insurance (SUI) rate varies by state, and by situation within each state. In Massachusetts, for example, SUI can require up to 12.27% of up to the first $14,000 of the employee’s income. Louisiana’s rate tops out at 6.2% of the first $7,700 of income.
For SUI and all other employer taxes, we will continue to follow state rates from California and Texas. The California SUI is a maximum of 6.2% on the first $7,000 of income. According to tax-calculation websites, the California average SUI rate is 3.47%. This brings California SUI to $243. The Texas SUI is a maximum of 7.58% on the first $9,000 of income. According to the Texas Workforce Commission, the average SUI rate for Texas employers in 2013 is 1.82%. This makes the Texas SUI $164 in our example.
So, with federal and state unemployment taxes in the mix, the cost of employing our median-income worker is $55,663 in California and $55,556 in Texas.
In some states, the employer also pays on a per-employee basis into a state disability insurance fund. In California, the SDI rate is 1.0% on up to $100,880 of employee income. The California SDI for our example is $514. Texas does not have an SDI fund. In California, the cost of employing our median-income worker is now $56,177.
California levies an Education Training Tax on employers for which the rate is 0.1% on the first $7,000 of employee income. The California ETT adds $7 to the total, making it $56,184 to employ the median-income worker. Texas does not have this payroll tax.
California requires employers to carry worker compensation insurance. The base rate for 2012 was $2.49 per $100 of payroll, which in our example comes to $1280 per year. The California median-income worker now costs the employer $57,464.
Texas doesn’t mandate worker compensation insurance, although the state insurance commissioner warns of the liability an employer takes on if he doesn’t carry it. Texas does, of course, regulate the worker compensation insurance market. In Texas, the base rate was $1.38 per $100 of payroll in 2010, yielding a premium of $709 for our worker. The Texas median-income worker, assuming the employer carries worker compensation insurance, now costs $56,265.
Health insurance
Health insurance is a category all its own, in part because it is such a big expense. For employer-provided health insurance, which is mandated by the federal government for employers with 50 or more employees, we will use 2011 data from the Kaiser Family Foundation, which is broken down by state. We will note that average premiums across the nation had gone up by the end of 2012, so you are free to play with your own numbers if you prefer.
In California, the employee paid $3,790 for his family insurance plan out of the $35,000 or so he had in his after-tax income. The employer paid $11,867 for the employee’s family plan. The cost of the California median-income employee is now up to $69,331.
In Texas, the employee paid $4,318 for his family insurance plan. (He paid no state income tax, however, unlike his California counterpart.) The employer paid $10,585. The cost of the Texas median-income employee is now up to $66,850.
And now is a good time to put this in perspective. To employ the median-income worker, the employer must find the value of his services to be over $66,000 in Texas and over $69,000 in California. As measured by what the employer is willing to spend on him, the value of the earner’s work is at least that much.
But government mandates and taxes ensure that the worker’s official income is substantially less than that: $51,404. The employer is prohibited by law from paying the employee what he’s worth. The employee’s productive value must be skimmed off the top to funnel money to government-mandated entitlement, insurance, and education programs. If not for those programs, the worker’s true income would be not $36,194, and not $51,404, but at least $66,850.
It’s true that the worker would have to make his own decisions about saving for hard times and paying for health insurance and/or medical emergencies. If he and his family are living on $36,194, however, it’s a pretty good bet that he could save and insure them adequately on $66,850 – and also be able to afford a large-screen TV.
If the worker is in a union, he sees even more of his value to the employer skimmed off in programs decided upon by third parties. Besides union dues, he and his employer pay into private retirement and health care funds – amounts the employer can only afford because the employee is worth that much to him, but which the employee doesn’t see in his paycheck, and which he might have had other plans for, if he received the amounts in cash. In states without right-to-work laws, government effectively enforces this arrangement.
So keep in mind, from now on, the big discrepancy between an employee’s productive value and what he gets to take home in his paycheck. If his work weren’t worth the total cost of employing him, the employer would have no job to offer him. (And that’s a growing problem for the U.S. economy.) But government requires by law that the employer not pay the worker what he’s worth, and that the employee not keep even what he is nominally paid. Instead, as much as 51% of his actual productive worth is siphoned off in mandated expenditures and taxes.
The only way to work legally in the United States is to subject yourself to this value-siphoning scheme. Conversely, the only way to take on an employee legally is to take on all these costs, which enrich not the employee, but the government and its designated beneficiaries. Paid work is the basis for an enormous government scheme for moving value around among designated recipients, all but two of whom have no direct stake in the actual generation of the value.
Too many politicians have come to see the people in this mechanistic light: as anonymous generators of value, whose product the government is entitled to distribute according to its whim. It really is the case that modern American government sees itself as letting the people keep some of what we earn. Seeing at least a fifth of our productive value sent off by our employers to governments and insurance companies – before we even start paying our own taxes – is the price we are expected to pay for the privilege of having employment.
Of course, many forms of employment can’t survive under these conditions. The employer just can’t charge enough for the product to pay off the government before paying the employee. So jobs disappear and never come back.
This is one of those Liberty 101 essentials that we will have to get our minds around if we are to change our nation’s course. Beyond being unaffordable, this value-siphoning scheme is antiliberal and posits an invalid idea about man and the state. There is no such real-world condition as one in which the government knows better than you and your employer how much you “ought” to be compensated, or how.
It is no irony; it is merely predictable, that when government does intervene in this area, the worker ends up being paid less than he is worth. Big government – not capitalism – is the true skimmer of “excess value.”
J.E. Dyer’s articles have appeared at Hot Air, Commentary’s “contentions,” Patheos, The Daily Caller, The Jewish Press, and The Weekly Standard online. She also writes for the new blog Liberty Unyielding.
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The Optimistic Conservative 
This is a good primer on the fiscal burden of government, but it does not include the regulatory burden. Periodically there have been attempts to estimate the aggregate regulatory burden, but all of these efforts have suffered serious methodological problems. The reason is that governments usually do not count regulatory costs at all, and when they do count regulatory costs they count them badly. It is not in any government agency’s interests to fully account for the costs it imposes.
Twenty years ago my estimate of the aggregate federal regulatory costs was 1/4 of GDP. (Why 1/4? I was fairly confident that it was more than 1/5, but dubious that it was as high as 1/3. This may seem lame, but anything more precise would have been misleading.)
Today I am fairly confident that 1/3 is a better estimate. Vast new tracts of human activity in America that were not federally regulated at all in 1993 are heavily regulated today.
Virtually all of this is hidden from view. People begin paying the regulatory costs of government even before they go to work on January 2. Indeed, people pay these costs even if they never work a day.
Thanks, RB. You’re quite right that this post doesn’t address regulation, which undoubtedly makes us work harder and pay more for the same end result in our lives. (That’s a point I’ve made often in the past, of course.)
Those who impose the regulations would argue that we are getting a different end result, because the regulations are mitigating “problems” that we would have otherwise. Under today’s regulatory regime, however, those “problems” are almost invariably difficult if not impossible to measure (or even usefully define), and their only apparent effects on actual people are the “second-order” effects of the regulation.
Regulation is rarely held to account for what it was supposed to achieve; moreover, the goalpost keeps being shifted in many realms of regulatory intervention.
There’s a lot to say about regulation, and it definitely has malign effects like depressing wages and job formation. I hope with the Liberty 101 series to highlight important issues in small doses, and with a narrower focus in each post, as people’s eyes tend to glaze over if too many points are raised at once.
We devote an ever-increasing percentage of our time, capital and labor to complying with regulations that do very little to increase our well-being. I thought, when the economy first went into a tail-spin, that this would be the ideal time to shed burdensome taxes, regulations, and bureaucracies. I was wrong. Government holds those things to be more important than producing the basic goods and services required for a comfortable existence.
It is as if a starving man, instead of devoting his time to gleaning what he can from the field and baking it into bread, spends half his time sorting his few grains of wheat by size and color. In days past we would say he was crazy. Now, there’s probably a federal regulation requiring such non-productive activity.