12/10/2012 10:16 am ET Updated Feb 09, 2013

How to Secretly Tax the Poor

There are many ways to make those who pay taxes less likely to notice the burden, and this is especially true when it comes to taxing those who are poor. And when I say "less likely to notice the burden" I do not mean that the poor are less likely to suffer the burden of these taxes. Today I will offer one example of what we might call "hidden taxes" which are levied on the poor, and I'll have other examples in future posts.

Suppose that if, instead of hiring employees at $12 per hour, an employer actually paid $9 per hour and was required to pay $3 per hour to the federal government to cover all the taxes that workers might have normally paid. Under such a system we might eliminate tax filing altogether for those whose income comes only from their jobs. As a result, many employees would believe that under this arrangement they paid no taxes, since they would not be writing the checks or seeing any deductions from their paychecks.

Of course, it is the labor of the employees that creates the money sent to Washington on their behalf, and the rate for that labor would be lower to compensate for the taxes on the employer; three dollars less for each hour worked, in this example. There is nothing nefarious about the lower pay that would be offered by employers. They can only afford just so much total cost for a worker, and if taxes paid on behalf of that worker are substantially higher, wages are naturally going to be lower.

On the other hand, there is something wrong with hiding who is paying taxes to our government and to what extent. The hidden nature of the taxes in the system described would make it possible to twist the truth in political discussions. It follows that people might vote differently if they do not actually know who is paying how much.

Now let's look at the reality, because the scenario laid out here is not entirely theoretical. In fact, one of the biggest hidden taxes that workers currently pay is the half of payroll taxes that the employer writes the check for. Since the entire 15.3 percent rate paid for Social Security and Medicare taxes is the product of an employee's labor and based on actual wages, it's proper to say that he or she pays that tax, whether or not this is done directly (most economists will tell you that the employer share just comes out of what would otherwise be higher wages). And it is a tax; more than one analysis of Social Security shows why it's not a retirement fund by any standard definition.

There are no deductions or loopholes for these taxes, which means the poorest worker pays 15.3 percent of what he earns in taxes to the federal government (some economists and mathematicians will point out that we should call the 7.65 percent portion paid by the employer part of the wages earned, and so the tax paid would be 14.2 percent of total wages, but that doesn't change the relevancy of following points). This is the rate paid even by the workers Mitt Romney complained about, those included in the 47 percent who do not make enough money to pay one particular tax: the federal income tax. In other words, many of these low-income workers actually hand over a larger percentage of their pay to the federal government than Romney does. On income of $13,696,951 in 2011, Romney paid 14.1 percent in federal income tax.

My guess is that most workers do not realize they pay that other half of payroll taxes, or that they pay a higher tax rate than Mitt Romney. Whether or not the relevant tax laws were intended to hide the truth, this is one example of how the system quietly taxes the poor while creating the appearance that they are not taxed.

In my next post I'll describe a much more subtle case that stems from a general ignorance of economic principles and sometimes results in much higher property tax rates for the poor.