Employee Payroll Taxes: The Hand in Your Pocket

Attention aux PickPockets (dans La Tour Eiffel)

The Canadian Taxpayers Federation has released its annual report detailing nation-wide tax increases for 2013. In a news release published on its website, the organization released the following summary:

“Every Canadian will be paying more in 2013 thanks to rising CPP and EI premiums,” said CTF Federal Director Gregory Thomas. “EI and CPP contributions are taxes, pure and simple. Wage earners have no choice whether to pay them or not.”

The CTF’s annual release shows that federal taxes for Employment Insurance and the Canada Pension Plan are headed higher, while in British Columbia, payroll health taxes will hit wage earners harder. Provincial governments in Nova Scotia, PEI and Manitoba will use inflation to push wage earners into higher tax brackets, while Ontario bumps its top tax rate for high-income earners. Quebec is launching the broadest assault, adding an extra income tax bracket, hiking its health tax for high income earners, boosting sin taxes on liquor and tobacco, and raising contribution rates for the province’s pension plan and its parental benefits plan.

“Each and every one of these tax grabs cuts Canadians’ purchasing power,” continued Thomas.

Canadian workers earning at least $47,400 will pay $891.12 in EI premiums in 2013, up $51.50. Employers will pay $1,247.57, an increase of $71.61.

“For every Canadian job that pays $47,400 or more, you and your boss are sending $2,138.69 to the EI fund,” said Thomas. “This is all to pay for an unfair, wasteful employment insurance system you might never get to actually use.”

For anybody earning at least $51,100 Canada Pension Plan contributions are going up $49.50 to $2,356.20, with the employer’s share jumping an identical amount. The total CPP payroll tax rises to $4,712.40.

“Politicians who talk about boosting CPP benefits never talk about the $4,712.40 they’re already taking from workers to pay for the pensions we have now,” said Thomas.

Combined CPP and EI payroll taxes now total $6,851.09, an increase of $222.11.

Many people are unaware that their employer also contributes payroll taxes on their behalf. Even fewer realize that these additional costs are indirectly borne by employees themselves.

Let me explain. In deciding whether or not to hire a potential employee, employers weigh the value of the productive output of the worker against their total compensation package. The total compensation package includes incentives such as benefits and vacation entitlements. It also factors in payments to government such as employer contributions for CPP and EI.

Businesses strive to achieve profits. As a result, in order for a potential worker to be hired, an employer must expect that the productive output of the employee will exceed his or her total compensation.

Payroll tax hikes by government force total compensation higher. Assuming worker productivity remains unchanged, employers must either reduce the workforce, pay employees less, or increase prices. In each of these scenarios, workers bear the costs associated with subsidizing those who do not work.

It gets worse. As more money goes to government, there is less available for savings and investment. This lowers the stock of capital goods, resulting in decreased worker productivity. This also lowers wages.

More money to government also means more government spending – on things like bureaucrats who write and enforce burdensome regulations (often to the point of absurdity). Regulatory compliance requires considerable time and money. This also lowers overall worker productivity and, you guessed it, wages.

Government spending means a hand in your pocket. There are no free lunches.

On the other hand, tax cuts increase liberty.

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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