Why are some wage taxes officially paid by the employer, even though they're really paid by the employee?

Question

My current salary is taxed at two levels: first, the employer has to pay a certain number of taxes on my wages. The rest of the money is then considered to be my salary and I pay other taxes (social security, medical insurance, income tax) from it. My real tax burden is around 47%, while my "visible" tax burden is 28%.

Why is the current system in place? Wouldn't it make more sense for employees to pay 100% of the taxes they own to the government, rather than pretending the employer owns some of them?

I live in Czech Republic, but I assume the same system exists in other European countries.

Answer 1

German version here. I also never understood this and am still convinced that

• as employee I'm mainly interested in the net amount that arrives at my account after all obligatory taxes, fees and social insurance has been paid (aka employee's net wage), and
• as employer I'm mainly interested in the gross amount vanishing from my account including all those "taxes" (aka employer's gross wage).

That being said,

• The importance of the intermediate (roughly halfways) employee's gross wage is certainly mainly a political decision. "Employer and employee share the social insurance costs" sounds nice politically, and that few people question this mantra does not look complimentary wrt. the financial intelligence of the general population...

• But we also need the numbers that are the basis for all those calculations as most of them are specified in percentages. And there it is convenient to have a single number for the whole bunch of "taxes". Using employee's gross instead of employer's gross or employee's net is, as I said, mainly a political decision.

However, if you take a closer look at the various fees, taxes and social insurance contributions, it turns out that

• some of them can genuinely and logically be attributed to the employer only, and pretty much the only thing that puts them into this wage discussion is that they are calculated on the basis of paid wages. These are e.g. the work accident insurance, employer's insurance for ongoing wages they pay for employees on sick leave (first 6 weeks are paid by employer, then employee's health insurance takes over) and an obligatory insurance for wage substitution if the employer goes into insolvency. These are included in the employer's gross (cost of labor) calculation, but unless the employee is curious, they'll never meet these, and it doesn't make sense to include them into the basis of the employee's income tax. Of course, social insurance could be organized in a different way (e.g. all this is covered by normal health insurance) where this difficulty does not appear.
  However, as the social insurance system is, employer's gross is a slightly inconvenient basis for calculations of, say, employee's income tax.

• Employee's net wage is similarly inconvenient. From the point of view of the income tax, the so-called employee's net wage is at best an approximation - a thorough calculation is only done at the employee's income tax calculation which depends also on factors that are totally independent of the employment. This includes also e.g. some types of expense and insurance that are fully up to the employee to decide, such as some additional insurance such as foreign country health ~, permanent inability to work ~ or 3rd party liability insurances.

• Considering those two points, it does make sense to choose a common stopintermediate number for those calculations. However, it could also have been employer's gross minus clearly employer-related social insurance or employee's wage before taxes but after social insurance.
  As those options would in politics be referred to as "employee pays social insurance" vs. "employer pays social insurance", I guess the political decision was to avoid those discussions by putting the basis pretty much into the middle.

• One IMHO adverse consequence of this is that it makes the transition employee <-> freelancer/self-employed somewhat rough: for freelancers the equivalent of the employer's gross is used as basis for social insurance calculation: roughly, employee's gross of 50 k€ corresponds to employer's gross (excl. the employer-only insurances) of 60 k€ and employee's net of 30 k€. Health insurance is currently about 14.6 %, for an employee of 50 k€, i.e. 7300 €/a whereas for a freelancer (so-called voluntary obligatory [!] health insurance, freiwillige Pflichtversicherung) the 14.6 % would be calculated of the 60 k€*, i.e. 8760 €/a, or 1/5 more with nominally the same percentage.
  However, smooth transition for these two types of earnings has never been a political goal, rather the opposite (at lower earnings, the differences become even more stark: freelancers/self-employed have a minimum fee of 400 €/month, employees not. OTOH, an employee with smaller self-employed side business does not pay social insurance on the self-employed income). Politics here have focused (and still do so) pretty much exclusively on the so-called "normal work relationship", i.e. full time employee with a single employer.

  * this assumes that there are no additional sources of income (no dividends, interest etc.): for self-employed, the basis for health insurance calculation is the total income of all sources, whereas for employees other sources but the wages are "free" as long as they are lower than the wages.

• One point that further blurs the boundary between what part of the costs are assigned to whom is that all wage-related obligatory fees/taxes are paid before the employee receives their net wage (employer not paying the social insurance fees or taxes => criminal offense, not paying wage => obligatory insurance of the clearly employer jumps in [to some extent, after a while]). From a practical point of view this makes sure that however irresponsible the employer is with their finances, they'll never drop out of health insurance or get into arrears with their taxes.

Answer 2

As well as the visual impact - employees don't see the money disappearing directly from their paycheck so don't feel as heavily taxed - there's usually one practical difference, at least in the UK.

Employers are generally prohibited in law from explicitly passing the tax onto their employees. Of course the presence of the tax will affect how much they are willing to pay, especially over the long-term and when deciding on pay rises. But if there's a sudden increase in the tax rate, that will fall on employers immediately, they wouldn't be able to reduce their employees' pay directly.

Answer 3

We have the same thing here in the United States. We have "social security tax" that is about 12% of your salary. Theoretically, the employer pays 6% and the employee pays 6%. Of course as far as the employer is concerned, this 6% is part of the cost of having you as an employee. It's part of your salary. An employer would have to be a complete idiot to not add that to an employee's salary -- along with the cost of benefits -- when calculating whether this new employee is worth the cost of hiring him.

There's also "unemployment insurance tax" that is theoretically paid 100% by the employer. Maybe other taxes I'm not thinking of at the moment.

There are two effects of this:

1. To the employee, his taxes look lower than they really are. Many employees are probably unaware that these taxes are being paid, or if they are, they don't think through that the money is coming out of their paycheck, they think it's coming from "the company". There are obvious political advantages to this. Here in the US, politicians and activists regularly talk about increasing taxes on corporations rather than on individuals, evading the seemingly obvious point that ultimately a person will have to pay this tax, whether employees in the form of lower salaries or lost jobs, stockholders in the form of lower dividends, or customers in the form of higher prices.

2. When the tax is increased, the employee only directly pays part of the increase. Exactly where the rest of the money comes from depends on the circumstances, see my point #1. Ultimately either pay raises will be smaller, or in extreme cases there may be pay cuts and/or layoffs, or stockholders will get smaller dividends or no dividends, or prices will have to be increased.