Posts Tagged ‘employee benefits’

Cui sumpto?

Friday, 20 March 2009

In the entry in which I previously discussed tax incidence, I made the point that (setting aside transactions costs) the distributed burden of a per-unit tax is the same regardless of whether the tax is formally imposed upon the buyer or upon the seller or upon both. I didn't, though, explain who then actually bears the burden, because that was irrelevant to where I was going with the entry. But it has preyed upon my mind that I didn't explain that bit.

The answer is that the burden falls most heavily on whichever party is least flexible in response to the monetary price.

Imagine, for example, that buyers, driven by some internal compulsion, must always buy (or try to buy) the same quantity of something, regardless of its price. Price won't necessarily rise without limit, because of competition amongst sellers. If a per-unit tax is formally imposed upon buyers, well, they'd buy that same quantity and then pay the tax on top of what they'd been paying the sellers. Setting aside feelings of pity, or somesuch, the sellers would just shrug. If a per-unit tax is formally imposed upon sellers, then they can otherwise pass along the full cost to their buyers, and competition isn't going to help buyers because the sellers all face the same increase in their costs, so that their calculated optimal prices just increase by the amount of the tax.

On the other hand, if sellers somehow always had to sell the same amount while buyers were flexible, then the shoes would be on the other feet. If the tax is formally imposed upon sellers, then they'd just sell the same amount at the price where quantity demanded absorbed that amount. If the tax is formally imposed upon buyers, well, then buyers are at least going to slightly reduce their consumption unless the sellers cut their prices to fully-offset the tax, so the sellers do this if they must sell that same amount.

When the tax isn't actually per unit, the mathematics and the results can be somewhat messier, but the same underlying dynamics will decide the distribution of the burden.


In that earlier entry, I said The next time that you hear or read of a politician arguing for employer-provided benefits, such as for health-care, consider the incidence. My primary point at that time was that there may be little or no difference in ultimate burden between a tax formally imposed upon employers and one formally imposed upon employees. But let's pursue the question.

Supposèd advocates of the interests of employees often call for requiring various sorts of employee benefits. At the same time, these alleged advocates tend to model the labor market as if workers have very little choice in their terms of employment. But if, indeed, workers don't have much flexibility, then it will be they who bear most of the cost of the mandated benefits — implicitly they are forced to buy the benefits, rather than spend their wages or salaries on other things.

The accuracy of that characterization of inflexibility will vary across regions, times, and employee-types. All else being equal, it will be less true in times when employers are competing heavily for workers, and more true in times when employees are struggling to find or to keep jobs. Thus, for example, in a recession, employees tend to bear more of the cost of benefits supposedly funded by employers.