Theory suggests that in perfectly competitive markets, mandated benefits are more efficient than payroll taxes. Discuss why we see both payroll taxes and mandated benefits in the U.S. and discuss the implications for efficiency.
It is imperative to discuss concepts of Competitive Market, Payroll Taxes, and Mandated Benefits before we discuss how mandated benefits and payroll taxes are viewed and which of these are efficient.
PERFECTLY COMPETITIVE MARKET
Economists consider the perfectly competitive market as a hypothetical market. It may exist in reality, but for a brief period. In such market, there are large numbers of sellers, who sell identical products to a large number of buyers, who have perfect information. The entry and exist, in such market, is easy and firms are price takers. It suggests that firms are not in a position to influence the market. Also, in the long run, firms earn zero economic-profit. A pure, perfectly competitive market does not exist in the United States; however, their markets that have attributes of the perfectly competitive market (Myers).
PAYROLL TAXES
Either these types of taxes are imposed employers (indirect), or they are imposed, employees. They are mostly calculated as a percentage of salary, which employers pay to employees. From the study of these taxes, we know that payroll taxes fall in two categories, which are 1) deduction from the wage of an employee and 2) taxes that an employer pays based on the total wages that the employer pay to his/her staff. These types of taxes cover advance payments of social security, income tax, various insurances (Medicaid and Medicare), etc. (Murray).
MANDATED BENEFITS
Mandated benefits are understood as health benefits, which a firm provides to its employees. Sometimes firms provide these benefits as a part of a strategy to increase overall productivity (positive work deviance). However, in many states, of the United States, the law compels firms to provide mandated benefits. These benefits cover not just cover health insurances of various types, but also ensure that employees get other types of benefits too, which do not fall in the health category (Bihari).
PERSPECTIVE ON MANDATED BENEFITS AND PAYROLL TAXES
It is believed that mandated benefits are better and efficient than payroll taxes. It is because the mandated benefit does not put the burden on employees, but rather on the employers, as states make it compulsory for firms to provide these mandated benefits. We know that payroll taxes eventually burden employees, even if employers are paying taxes, as firms or employers withhold the portion of salary (percentage of withheld salary may vary from state to state or country to country) of salaries. Therefore, payroll taxes put the monetary burden on employees in normal industries and markets; those, which are not perfectly competitive, market industry.
We must recognize that in perfectly competitive industry/market, the firms are wage takers in perfectly competitive labor-market/market/industry. It suggests that deductions in prevailing wage have a serious effect on the supply of labor, as the portion of wage is withheld. However, the mandatory benefits are excited or encourage employees to actively and passionately look for work, which expands the supply of labor (Murray).
Another reason, for preferring mandated benefits, is that they put the minimum burden on employees and the various kinds of health insurances. Medical services are becoming expensive, which is why people are anxious, and they prefer such employment that offers them various kinds of health services and benefits (in the form of insurance).
However, economists are of the view that because of the mandated benefits, the price of medical services and medical insurance has swelled dramatically. Also, they also assert that such benefits are against the spirit of capitalism, which strongly discourage government intervention of any sort or type.
IMPLICATIONS FOR EFFICIENCY
From the study of both systems/policies, it is very evident that most systems/policies are evolving. As corporate and market systems maturing, these policies are becoming more efficient and result-oriented. However, these systems or policies are far from perfect; therefore, they are not able to produce the required dividends.
Payroll taxes Efficiency
Payroll taxes have a slight adverse impact on the supply of labor, as it is a deduction of a portion of wages (every month). The burden, of this deduction or withholding of a portion of wealth, eventually falls on an employee, which affects his/her income and consumption (considered an engine of growth) is a function of income. It not only affects the supply of labor, but also this adversely affects overall consumption, which is the main component of Gross Domestic Product growth. However, in a market/industry, which is not perfectly competitive, payroll taxes may have a positive impact. In comparison to mandated benefits, they do not have a large positive impact. Their efficiency could be increased if the incidence of payroll tax were shared between the employer and employee. As the incidence of the tax solely falls upon the employee; therefore, such tax is less efficient (Bihari).
Mandated Benefits Efficiency
The mandated benefits program has its challenges. For instance, this system puts the entire burden, of providing particular kinds of benefits to employees, on employers or firms. To an extent, this affects the capital structure and capital capacity of a firm. Also, it brings into play moral hazard phenomenon. For instance, when firms are paying all the expenses of medical services that an employee will utilize, an employee becomes less careful and cautious. It affects the overall prices of medical services and health insurance. Therefore, the program policy or system must be reformed, and employee and employer must share the burden. It will also address the issue of moral hazard (Klick).
Work Cited
Bihari, Michael. “Health Benefit Mandates Are Controversial.” Very Well. Very Well, 23 August 2017. Web. 6 March 2018. https://www.verywell.com/mandated-health-insurance-benefits-1738931.
Klick, Jonathan. “Diabetes Treatments and Moral Hazard.” Journal of Law and Economics 50.3 (2007): 519-538.
Murray, Jean. “What’s the Difference Between Payroll Taxes and Employment Taxes?” The Balance. The Balance, 23 April 2017. Web. 6 March 2018. https://www.thebalance.com/payroll-taxes-and-employment-taxes-398707.
Myers, Danny. Construction Economics: A New Approach. Taylor & Francis, 2004.
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