WORKERS SHOULD WANT TO PAY MORE FOR SOCIAL SECURITY

Abstract

I. INTRODUCTION Although economic theory cannot resolve all the controversies concerning Security, simple supply and demand analysis can helpfully change the terms of the debate concerned with how the Security tax is divided between employers and workers. Defenders of the existing system typically argue that workers pay only half the tax (6.2%) because, as required by law, the other half is paid by employers. Opponents of the existing system typically argue that workers pay all of the Security tax because their compensation is reduced by employers to offset their portion of the tax. For example, former House Majority Leader Dick Armey (2005) states that Social Security alone takes 12.4 percent of workers' incomes. That's more than most workers pay in income taxes. In a reply to Armey, Marilyn Scheiner (2005) states that Armey should have said that Social Security alone takes 6.2 percent of workers' income. The employer matches the employee's contribution for a total of 12.4 percent going into the Security coffers. (1) The first thing economic analysis tells us about this debate is that both sides are wrong on the facts, barring unlikely conditions. The second and more interesting insight is that each side of the debate is making a claim that supports the position of the other side. Any student in an economic principles course should know that the distribution of a payroll tax burden depends on the relative elasticities of the labor demand and supply curves. If the labor supply curve is very inelastic relative to the labor demand curve, then most of the burden of a payroll tax will fall on the workers. On the other hand, if the labor demand curve is very inelastic relative to the labor supply curve, most of the burden will fall on the employer. So the debate over who bears most of the cost of the Security tax has to consider the relative elasticities of labor supply and demand. What the Security legislation states about the distribution of the tax burden is completely irrelevant. (2) This may seem to suggest that the opponents (supporters) of Security should argue that labor supply is less (more) elastic than labor demand, because this implies that less (most) of the tax burden is borne by the employer. But why should the desirability of Security depend on the distribution of the tax burden? Supposedly there are benefits from Security, so its desirability should depend on how those benefits compare to the tax and how the net benefits are distributed. Even though labor supply and demand elasticities are relevant to the distribution of gains or losses from Security, we shall see that the desirability of Security (as measured by its net value and its benefits to workers) is completely independent of those elasticities. Once we take into consideration the benefits of Security, we find that when advocates and opponents argue over the incidence of the tax, they have their arguments completely backward. The strongest argument in favor of Security is that workers are paying more than its cost. On the other hand, the strongest argument against Security is that the burden of financing it falls mostly on employers. If employers are paying most of the cost of Security, then, for the sake of workers, it should be scrapped immediately. II. SOCIAL SECURITY AND SHIFTS IN THE LABOR SUPPLY AND DEMAND CURVES Our argument is based on straightforward implications of labor supply and demand curves shifts in response to the costs and benefits of Security. (3) We begin in Figure 1 with labor supply curve S and labor demand curve D, assumed relevant without (before) Security. The vertical axis represents the monetary wage and the horizontal axis represents the quantity of labor. The equilibrium wage and labor quantity are given by [W.sub.B] and [L.sub.B], respectively. …