The Lemon Fool

My understanding is that payroll taxes chiefly fund pensions, social insurance and other benefits, such as sick pay.

I assumed that the employer is merely deducting the contributions from the employee's salary, rather than being an out of pocket expense incurred by the employer.

Is it because the employee will inevitably demand pay increases, so that they can better shield their salary against mandatory contributions, such as for a workplace pension and social insurance, and thus the marginal cost of labour increases?

My bad, I didn't take into account tax deductions.

So the marginal cost of labour technically increases, but the distributional impact on the employer, I guess, is reduced / lessened due to tax deductions.

From Yahoo Finance today:-

The FTSE 100 (^FTSE) shot up 1% as UK firms raise wages at the fastest rate in 25-years as worsening staff shortages hand employees bargaining power. The latest report on jobs from KPMG and REC showed the average salary awarded to new permanent joiners climbed more in March than at any time since records began in October 1997.

Your post probably a bit technical for me

distributional impact on the employer

- but wages surely are an "out of pocket expense incurred by the employer". If the employer wishes to continue making a profit then he/she/it is going to have to save the money elsewhere or, more likely, increase prices.

plaguedbyfoibles wrote:My understanding is that payroll taxes chiefly fund pensions, social insurance and other benefits, such as sick pay.

I assumed that the employer is merely deducting the contributions from the employee's salary, rather than being an out of pocket expense incurred by the employer.

Is it because the employee will inevitably demand pay increases, so that they can better shield their salary against mandatory contributions, such as for a workplace pension and social insurance, and thus the marginal cost of labour increases?

I think it's a mistake to section off different areas of taxation and expenditure. Money is fungible - a pound of tax raised from NICs is worth the same as a pound of tax raised from fuel duty, it goes into the same "pot" (well, not really, as it's spent even before it arrives), and the government spends it as it sees fit.

It's naive to think that your NIC increase is directly going towards anything in particular. If the government wants to spend more, it either has to raise more revenue or borrow.