Wednesday, January 02, 2008

Handy dandy calculator 

So do you know what you'll get for a raise? You can figure out what it means for your bottom line by using Ironman's paycheck calculator. This is a reminder, by the way, that income tax withholding is very costly and blurs our incentives.

I probably have mentioned this here before, but I used to work while in graduate school for a private consulting business operated by Craig Stubblebine, a professor specializing in public finance at Claremont McKenna College. With my check I would receive a very elaborate "stub" showing both what was withheld and what I paid in. Let's use Ironman's data to show what I mean. Suppose you work for me as a research assistant and I pay you a salary of $30,000 to be distributed biweekly. You're married, have no children, and you can throw 3% of your pre-tax dollars in a retirement account, which I match. You also set aside $1000 a year to a flex medical account. You work in Minnesota. Craig would write out for you something like this.

Wages $1153.84 $14.42/hr

SocSec -$71.53 -$0.89/hr
Medicare -$16.73 -$0.21/hr
FIT -$50.83 -$0.64/hr

Income b/4
contrib $1014.75 $12.68/hr

401(k) -$34.61 -$0.43/hr
FlexHlth -$38.46 -$0.48/hr

Paycheck $942.11 $11.78/hr

Wages $1153.84 $14.42/hr
SocSec +$71.53 +$0.89/hr
Medicare +$16.73 +$0.21/hr
Unemploy +$26.77 +$0.33/hr

cost $1268.87 $15.86/hr

It took me a couple of times to figure out what he was getting at. But what he was trying to define was the size of the tax wedge created by income based taxes. I haven't included worker's comp or other such payments the government might require on the employer (in CA at the time there was a worker disability fund that he had to pay into and showed up on the employer half of the stub.)

I wonder whether people who advocate Fair Tax wouldn't be helped by using Craig's stub as a way to show how distorting income taxes can be. In short, my researcher's labor has to be worth almost $16 an hour for me to hire her, but she must not value her time more than $12.68 for it to be rational for her to give me that labor. (And this assumes she's perfectly willing to consume those bundles of retirement plan and health care.) An hour of her time worth between $12.68 and $15.86 are not going to be bought, so I will hire her less than I would otherwise.

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