PRESIDENT'S PAYROLL TAX PROPOSAL WOULD COST PEOPLE JOBS

To the Editor,

President Clinton has suggested that to finance a health care system, more than half of the cost (up to 80 percent) should be imposed upon employers either as a payroll tax or as a requirement that the employer pay this amount for the insurance premiums. This has been described as a "fair" way to apportion the burdens.

But anyone who has devoted much thought to the theory of tax incidence knows that the ultimate burden of any such tax, even if the payments initially come from employers, is on the employees. This is true whether the tax on employers is based upon the employer's total payroll, whether it is based simply on the number of workers in his employ, or whether it is based on the cost of providing each worker with insurance coverage.

The reason is that the existence of this tax on the employer reduces the demand for labor, thus causing wage rates to be lower by the amount of that part of the tax which the employer is required to pay. Whatever wage rate an employer finds he must pay to obtain the labor he needs, he will add to his labor force up to a point beyond which each additional worker would increase the firm's costs more than it would increase the firm's receipts.

Suppose, for example, that you are able to obtain the services of a given grade of worker for $6 per hour. As long as the worker's services are worth the least bit more than that amount, you will wish to keep that worker in your employ. But now the law requires you (if you hire him) to pay a tax of $1 for each hour of work that he performs, then you will lay that worker off (or refuse to hire him) unless he will accept employment for only $5 per hour.

Until wage rates dropped to their new level (lower by the amount of the payroll tax) the number of workers employed would decrease.

The result of the imposition of such a payroll tax would almost certainly result in a substantial increase in the amount of unemployment since wage rates tend to adjust downward only rather slowly.

The popularity of the present proposal to rely on payroll taxes imposed mainly on employers is that most working people simply don't understand the economic principles involved, and believe incorrectly that this would put most of the financial burden on their employers.

PHILLIPS H. BROWN

Economics professor, ret.

Cape Girardeau