Monday, August 09, 2010

Creating A New Job Carries a Punishing Price Due to Government's 33% Surtax on a Typical Job

Michael Fleischer, a small business owner in New Jersey, writes in today's WSJ that when he adds it all up, it costs him $74,000 to put $44,000 in his median-paid employee's pocket and provide her with $12,000 in benefits, because of the 33% surtax charged by the state and federal governments for income taxes, Social Security taxes (employer and employee shares), state and federal unemployment coverage, workers' compensation, and Medicare (employer and employee shares).  Mr. Fleischer concludes that:

"A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price."

HT: Juandos and Pete Friedlander

38 Comments:

At 8/09/2010 7:51 AM, Blogger bob wright said...

I continuously bump into people that work for cash - they are off the grid.

Do you have any thoughts about the current size of the underground economy and how it might change in size as government mandates [overhead] increase?

 
At 8/09/2010 8:30 AM, Blogger juandos said...

Well Bob Wright that's an interesting question...

Consider the following dated April 13, 2009: Edgar Feige, an economics professor emeritus, says that is a sign that the underground economy in the United States has grown considerably and that unreported income now amounts to between $2 trillion and $2.25 trillion annually...

Then there's this bit by Richard W. Rahn is a senior fellow at the Cato Institute writing in the Washington Times dated December 9, 2009: New underground economy

 
At 8/09/2010 8:49 AM, Blogger Tom said...

60% of our economy is government. 45% of GDP in spending, plus 15% of GDP in regulations cost. Business must pass all their expenses on to their customers, so there is no escape for anyone. Does anyone believe that government is worth 50% more than everything else in your life? We are in a preposterous state of affairs.

 
At 8/09/2010 9:30 AM, Blogger bob wright said...

The democratic party claims to be the party of the "working man," whatever that is.

The democratic party is for higher taxes.

How many of the working men [electricians, plumbers, mechanics] you know do side jobs - jobs where they are paid in cash?

Why do these tradesmen want to be paid in cash?

Why don't they claim 100% of their income and pay the taxes the democratic bosses say people want to pay?

There appears to be a large disconnect between the "working man" and the politicians that claim to represent him.

 
At 8/09/2010 10:23 AM, Blogger Hydra said...

How much would it cost Fleischer to continue partial pay for laid off workers, pay them enough extra to pay 100% of their own social security tax, private injury insurance, and old age health insurance?

He does not pay any surtax for income taxes, that is withheld from his emplyees salary.

What Flesischer is really saying is that his expenses would be lower if his employees went without things they are now paying for. it is the employees that give Fleischer teh money he uses to pay for these benefits.

Fleischer gets his income for being the organizer and planner of their activities, but it is their activities that create the value added that makes their job (and his) possible.

There is something wrong with the reasoning that says it is going to cost him money to hire someone who will make him money.

================================
Wright is correct about the underground economy. We saw that come to light recently when shrimpers could not file claims because they had no records.

I knew a waterman (crabber) who married an accountant. When she got ahold of the books she was shocked to see that he earned $80,000 a year, because he lived a lifestyle that said if he head money in his pocket, he had money, otherwise, we went crabbing.

I'd guess the underground economy is 20% of the stated economy.

===============================

Where does Tom get his figures? The usual split is said to be 30% government and 70% consumers. i can't beleive thse numbers (either) because where does that leave maufacturing and othe business enterprise as a percentage of the economy?

================================

If a working man is avoiding his lawful taxes, he is no longer a working man, but a crook. That is a lot differnt than moving your boat to Rhode Isand in order to pay lower taxes.

There is no disparity between thinking certain taxes ought to be paid, and not wanting to pay them yourself.

 
At 8/09/2010 11:01 AM, Blogger Shakes The Clown said...

I think the underground economy is growing, and this is a fantastic article from a real business owner.

I think Argentina had huge payroll taxes before their collapse, and that a majority of their economy was off the books. At some point people just opt out and quit the madness.

 
At 8/09/2010 11:29 AM, Blogger Ironman said...

If you want to see what the numbers might look like for your own paycheck, using tax and benefit data from 2008, see this tool....

 
At 8/09/2010 12:49 PM, Blogger Junkyard_hawg1985 said...

Hydra,

Here is a source of the data showing total government spending at all levels is at 44% in 2010:

http://www.usgovernmentspending.com/downchart_gs.php?year=1900_2014&units=p&chart=F0-total&title=Total%20Spending#copypaste

I don't know where Tom's 15% in regulation cost is from.

 
At 8/09/2010 1:05 PM, Blogger Unknown said...

Small business owners, fire your employees and hire them back as "private sub-contractors" then just pay them in cash. What they do with their income or taxes is none of your business.

When you hire a plumber to come to your house and fix the pipes, you pay him off, he leaves and that's it. You don't file a 1099 on him, do you?

 
At 8/09/2010 2:17 PM, Blogger Free2Choose said...

Fleischer gets his income for being the organizer and planner of their activities, but it is their activities that create the value added that makes their job (and his) possible.
Spoken like a true Marxist. However, I doubt that any of his employees assumed any of the risk of capitalizing this business. I can promise you that they never took a second mortgage against their homes to purchase equipment, borrowed against a credit card to make payroll, or lay awake all night worrying about how they were going to make the lease/rent payment on the building. The owner/employer does all of these things (on top of "organizing activities" such as sales, marketing, operations, human resources, etc). But I guess you're right Hydra. Fleischer should quit his bitching, do his patriotic duty and just pay his "fair share". On the other hand, maybe all of those in the unemployment line should quit their bitching and just go start their own business. Maybe, since you seem to think it so easy, you should start by using your own f__ing resources to get the ball rolling.

 
At 8/09/2010 4:07 PM, Blogger Ron H. said...

Ya. What Free2Choose said.

 
At 8/09/2010 8:57 PM, Blogger juandos said...

"How much would it cost Fleischer to continue partial pay for laid off workers, pay them enough extra to pay 100% of their own social security tax, private injury insurance, and old age health insurance?"...

Why? Are YOU going to help Fleisher cover the costs so that he can hire another employee like Sally?

Hey Ironman thanks for the tools amigo...

You as usual come up with the goods!!

 
At 8/10/2010 11:03 AM, Blogger Jason said...

Free2choose, you ROCK!

 
At 8/10/2010 3:10 PM, Blogger Hydra said...

"Spoken like a true Marxist."

============================

Actually, spoken like a true employer. I know when my people can do something that I cannot, and that every time they do they make money for me.

If I did not have to pay that claimed surtax, I could either put it in my pocket or theirs, or some of both, or hire more employees, but it isn't clear to me that anyone winds up better off over all. I can pay workers comp, or pay them enough to cover their own costs in case of injury.

Or they can do without, but that option is not cost free either. Short-sighted stupidity is what cause someone to confuse giving credit where it is due with Marxism.

 
At 8/10/2010 3:15 PM, Blogger Hydra said...

When I said he was the organizer and the planner I intended that to include capital risk. credit goes where credit is due.

So if I work for Dow and own Dow stock, am I a capitalist or a marxist?

I prefer to be a realist, and I know that my business depends on me and my employees.

 
At 8/10/2010 3:28 PM, Blogger Hydra said...

"How much would it cost Fleischer to continue partial pay for laid off workers, pay them enough extra to pay 100% of their own social security tax, private injury insurance, and old age health insurance?"...

Why?

===============================

This has nothing to do with what I am going to pay for. The question I'm asking is this, suppose you eliminated all those things the surtax pays for and you eliminate the tax.

The implied argument is that this would be better somehow, but the question is better for whom? You are comparing one situation with a set of attributes with another situation without those attributes. I'm not convinced this increases the net value of the total system.

Either Fleischer pays workers comp, or he pays his workers enough to buy their own, or they get an effective decrease in compensation.

We could just give them the money and let them decide to spend it something other than insurance, but history has taught us that accidents do happen, and someone needs to prepare for them. That would be a legitimate part of Fleishers planning activity. Since we know from experience that most Capitalists are not that smart, we insist that they pay into workmans comp, unemployment insurance, etc.

 
At 8/10/2010 4:40 PM, Blogger Craig Howard said...

There is something wrong with the reasoning that says it is going to cost him money to hire someone who will make him money.

You're looking at it backwards.

He is saying that to provide this employee with her $44,000 take-home pay, she must now produce at least $74,000 of business revenue and he fears that number will grow.

And though you are correct that it must eventually come out of her pay (assuming she really is meeting her marginal productivity target), he must have the capital available now to pay her until the revenue she has generated is received.

All of that is getting more difficult as the government lays on more fees, taxes and regulations.

 
At 8/11/2010 2:40 AM, Blogger Ron H. said...

Hydra,

Craig summed it up for you very concisely, so I won't repeat that here.

It would appear from your several comments that you don't understand what a Marxist is. Read up on the subject so you can understand what Free2Choose is telling you.

And no, it is not the employees that create the value added, it is the business owner who combines the capitol and the labor to create something more valuable than the sum of the inputs.

If he is very successful at this, he becomes very wealthy, like Bill Gates, as we reward him for making our lives better. If he isn't, he soon goes out of business, and someone else gets to use those same resources, hopefully more successfully.

"How much would it cost Fleischer to continue partial pay for laid off workers, pay them enough extra to pay 100% of their own social security tax, private injury insurance, and old age health insurance?"

That you can even ask a question like this, makes me wonder how you can really be an employer. Which hat are you wearing? Are you the farmer, the chief research scientist, the expert on thermodynamics, or something else entirely that you haven't revealed yet?

 
At 8/11/2010 2:15 PM, Blogger Hydra said...

",,,And no, it is not the employees that create the value added, it is the business owner who combines the capitol and the labor ..."

===============================

How is he going to put together the labor, without the employees?


It takes management, capitalists, and labor to run a successful enterprise and both deserve fair compensation for what they do, which is what I said before, or tried to.


Some think government has no business in business, but consider the situation with airline delays. Afer numerous horor stories of passengers being imprisoned on the grounde the government stepped in with big fines for such behavior.

Last June there were almost 300 incidnces of passengers being stranded on the ground for over three hours.

This June, there were three incidences. If you tax something, you get less of it. So, explain to me why the government has to step in and force a business to treat its customers decently? Why does government have to step in to get businesses to treat their employees decently?

And there is the crux of the problem: private enterprise constantly screws up, and then they complain when government has to step in.

Sorry, the idea the it costs me money to hire employees who make me money is bunk. so is the ide that they contribute no value added.

 
At 8/11/2010 3:29 PM, Blogger Hydra said...

Are you the farmer, the chief research scientist, the expert on thermodynamics, or something else entirely that you haven't revealed yet?

================================
I'm no expert on thermo, but I have completed graduate courses in chemical thermo. The three general laws are pretty much the same.

Otherwise, that pretty much covers it, except for principal cost estimator for a few very large programs, like flying an airplane on Mars. You know, one of those government boondoggles.


This morning, between 5 AM and 8 AM, myself and my employees put several thousand dollars and several tons of product in the barn (warehouse).

I could not have done it by myself. Then I went to my day job ewhere I am someone else's employee. I see both sides of the coin because I'm on both sides of the coin.

 
At 8/11/2010 3:52 PM, Blogger Hydra said...

"He is saying that to provide this employee with her $44,000 take-home pay, she must now produce at least $74,000 of business revenue and he fears that number will grow."

==================================

You can't blame all that on taxes.

Revenue - profit - taxes - GNA - Overhead - materials = take home pay.

We have minimum standard for providing a job, just as we have minimum standards for pouring a foundation. Otherwise a bunch of clods will do it wrong.

Yes, it costs money and the number will probably grow. There is a real problem with creeping requirements, I concede.

So why do we have worker's comp? Because some moron didn't plan on protecting his employees from injury related to the capital equipment he provides in the workplace. Why do we have OSHA? Because some other moron decided that since his employees were insured, he no longer had to worry about safety, or training.

We bring this on ourselves by not treating our employees the same way we would treat ourselves.

=========================

If you provide workspace, tools, material, and specific instructions as to what to do, then you have an employee, not a private contractor.

If you have a private contractor, he is going to have to cover all those same expenses himself, and bill you for them unless he is going to risk everything by flying naked.

However, the surtax creates no competitive disadvantage only as long as there is a level playing field. The underground economy and some foreign economies don't play that way.

 
At 8/11/2010 3:57 PM, Blogger Hydra said...

Suppose Fleischer no langer has to pay workmans comp and doesn't. He has not saved cost, but only shifted the cost to his employees. If he does not pay his employees enough to make up the differnce, then he has just given them a pay cut.

The end result is a different system than what you had before, and to claim it is a superior system because it costs less (to Fleischer) is a logical error.

 
At 8/11/2010 4:13 PM, Blogger Hydra said...

It would appear from your several comments that you don't understand what a Marxist is.

==============================

I think you missed the point. You can't tell if some one is a capitalist or a marxist based on whether they are an owner or an employee.

I don't care much for isms or ists or ans or ats. I care about what works and what I've got to work with.

"Creating A New Job Carries a Punishing Price Due to Government's 33% Surtax on a Typical Job" doesn;t work for me for two reasons. I think 33% is an inflated, or hybperbolic claim. And the unstated claim is that you could create a job for less money without the tax.

Yes, you probably could, but it would not be an equally valuable job.

 
At 8/11/2010 6:04 PM, Blogger sethstorm said...


This June, there were three incidences. If you tax something, you get less of it. So, explain to me why the government has to step in and force a business to treat its customers decently? Why does government have to step in to get businesses to treat their employees decently?

Because an employer will not treat the greater part of their employees with any civility. Businesses see niceness as leaving money on the table. Thus, the government steps in and needs to step up enforcement, close loopholes, and make the "technically legal" illegal.

Why should the employees bear more risk than the employer without paying for it? Unless you like stepping the wrong way and being murdered or maimed in an "accident". But that's fine as long as you're doing the killing or maiming.

 
At 8/11/2010 6:04 PM, Blogger Ron H. said...

Hydra, your initial comment, which caused Free2Choose to get so upset with you, included this:

Fleischer gets his income for being the organizer and planner of their activities, but it is their activities that create the value added that makes their job (and his) possible.

This is almost straight from Marx, who felt that profit was an unnecessary 'surplus value on labor', and should belong to the worker. If you understood this you would know why he is upset with you. Your comment makes the employer seem almost incidental to the whole process.

Let me try to expand on what Craig said, so perhaps you can understand it.

In the article Fleischer explains that he must pay the employee Sally $74k/year in total. This means that she must produce MORE than $74k in revenue to the employer, or he will lose money by keeping her.

It doesn't matter whethershe is a W2 employee, or a contractor, he pays $74k for her labor at her pay rate. As government causes Sally to cost more and more, Sally must produce more and more revenue for Fleischer to remain employed, without seeing any increase take home pay.

 
At 8/11/2010 6:13 PM, Blogger sethstorm said...


In the article Fleischer explains that he must pay the employee Sally $74k/year in total. This means that she must produce MORE than $74k in revenue to the employer, or he will lose money by keeping her.

Or it hasn't occurred that Fleischer's business model is heading towards failure. If they have to have continual contempt & distrust for the employees, his business is hurting badly.

Perhaps she is already making the needed revenue, and Fleischer just doesn't want to admit it.

 
At 8/11/2010 6:51 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 8/11/2010 6:59 PM, Blogger Ron H. said...

"If they have to have continual contempt & distrust for the employees, his business is hurting badly."

I missed that part of the article. Where did you see that?

"Perhaps she is already making the needed revenue, and Fleischer just doesn't want to admit it."

I guess I missed that part too. Nowhere did I read that Fleischer planned to can her, or indicate she wasn't a valuable employee. He only pointed out how expensive she is due to government taxes etc.

Did you read a different article, Seth?

 
At 8/12/2010 6:25 AM, Anonymous Anonymous said...

"Or it hasn't occurred that Fleischer's business model is heading towards failure"

Most business models use profit maximization, which means employees or customers are going to lose sometimes. How could a business justify spending a $1 per car on a gas tank shield on 25 million units ($25 million) to prevent fire deaths when their legal/risk department predicts 2 lawsuits at $2 million each ($4 million)? Maybe their public relations department could talk the risk department into quantifying the cost of not putting the shield on, but few businesses will want to leave $21 million on the table without their arm being twisted.

So, to prevent that from happening, either labor unions or the government has to step in. My wife is from the same county in West Virginia where the Massey coal mine collapsed this year, her dad used to work the coal mines in that area, and her grandfather died of black lung disease from the mines. The people we talk to down there feel that the union enforced safety requirements would have prevented the Massey disaster (union miners can refuse unsafe work and still have a job the next day, and those guys know what is unsafe). On the other hand, most feel the mines could not be profitable following all the safety regulations that the union would have demanded, and they desperately needed the jobs.

It really is a sad situation when it is almost acceptable to sacrifice a few miners for the good of all the others to be able to feed their families. Should we tell someone they cannot play Russian roulette when there is a bag of groceries to feed their starving children after every pull of the trigger?

 
At 8/12/2010 3:50 PM, Blogger Ron H. said...

"The people we talk to down there feel that the union enforced safety requirements would have prevented the Massey disaster (union miners can refuse unsafe work and still have a job the next day, and those guys know what is unsafe). On the other hand, most feel the mines could not be profitable following all the safety regulations that the union would have demanded, and they desperately needed the jobs."

What a dilemma! Sounds like the miners are doing their own risk assessment. I used to do that every day when I decided whether or not to start my car & drive 37 miles to work.

Apparently the mining companies no longer need to worry about safety, as the unions have taken over that responsibility for them.

 
At 8/12/2010 4:10 PM, Blogger Ron H. said...

Walt G., Here's some interesting info on dangerous jobs. Mining isn't even close to the most dangerous as measured by number of deaths.

 
At 8/12/2010 5:10 PM, Anonymous Anonymous said...

Ron H. "Apparently the mining companies no longer need to worry about safety, as the unions have taken over that responsibility for them."

Pretty much.The mining companies do just enough to pass an inspection or hope they don't get caught, and if they do get caught, they hope the fine is less than the compliance. Anyone who works in safety knows OSHA is not adequate protection for employee safety.

The unions protect the workers by making sure the workers still have a job after reporting safety violations only to lose that job to the safety violators who save money by cutting corners and underbidding the compliant company. The unions also get involved in training both hourly and salary employees. And, yes, you can "safety" your way right out of business.

 
At 8/12/2010 5:22 PM, Blogger Ron H. said...

Walt G., here's some interesting info on dangerous jobs.

Mining isn't near the top as measured by number of deaths per 100k.

 
At 8/12/2010 6:08 PM, Anonymous Anonymous said...

Did I get censored? Maybe over a GM/UAW safety link?

 
At 8/12/2010 7:49 PM, Blogger Mark J. Perry said...

Walt: No censorship, it was a problem with some kind of spam filter that Blogger just started today, without letting me know. Any comment with a link gets sent to a special area, and I have to go in and approve the comments. I'll see what I can to get it fixed.

Mark

 
At 8/12/2010 8:21 PM, Blogger Ron H. said...

"No censorship, it was a problem with some kind of spam filter that Blogger just started today, without letting me know. Any comment with a link gets sent to a special area, and I have to go in and approve the comments."

Thank goodness! I thought I was losing my marbles. I checked every post to see where I had misplaced my comment.

 
At 8/12/2010 8:33 PM, Blogger Ron H. said...

Walt G., my comment that you quoted was meant to be sarcastic. If you inform someone every time there is something wrong, they don't need to watch for problems themselves. They will rely on you to check for them. I made the same point about restaurant owners being checked by health inspectors.

So, based on your comments, I can assume that miners really do assume responsibility for the risks of their working condition by continuing to go to the job each day.

 
At 8/13/2010 6:51 AM, Anonymous Anonymous said...

Mark, thanks for putting up with my ramblings. I knew there had to be a good reason why my post disappeared.

Ron H,

Did you put your seat belt on during your drive to work, or drive a car that your boss decided did not need one because he felt like it took you too long to put it on and figured the police would not catch you driving without it (and was willing to pay the fine if and when you were caught)?

Regulatory compliance of a 2 million sq. ft. building and assessing risk is part of what I do as my full-time job. You can't say that the job is risky and leave it at that. You have to reduce the incidence rate. If you do enough things wrong often enough your risks go up. So, you reduce the risk by doing fewer things wrong fewer times. I don't want to say people don't know what they are doing, but many, for whatever reason, are uninformed, poor judges of risk, or don't care. We do what we can with what we have and still try to stay in business. Ask yourself this, should there be guardrails on the side of the road on mountains? How many cars really need them? Isn’t it the drivers’ fault, and don’t they deserve to die if they misjudge the risk? Why should we, as excellent drivers, pay for that protection?

I used to have to travel to job shops in Detroit, and I could usually tell by looking at the building and watching the workers if it was union or non-union. I won't go into the numerous details here, but it’s very obvious (I never saw a worker weld standing in water under a dripping roof in a union shop for one).

All of our safety trainers are UAW, and many of our union leadership have bachelor or master degrees. On top of that, unlike salary, the union people stay put for longer than a year or two. If you come into a GM factory and want to know about anything from safety lock-out to asbestos dangers, you will be referred to a union member very quickly. You simply can’t learn that stuff in a year or two.

I realize fishing is dangerous, but I usually research the OSHA database for my information. My bias comes from deciding what to research and not from trying to sell to the public. The slanted information from the auto loans and the entertainment style of news nowadays finished my appetite for the main-stream media off. Now, if you want to know about Paris Hilton or Lindsay Lohan it’s great, you can probably even get a picture of a naked crotch or boob or two if you want.

 

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