Question

Use economic reasoning to analyze the impacts of an employee payroll tax to fund a program such as paid family leave

Answer 1

Employee Payroll tax is a tax on the employee which is generally a percentage of their salary which they get paid from their employer. This tax is generally deducted by the employer from the employee's salary before giving them and is than submitted to the government by the employer.

Paid family leave is a programme in which the employees are granted leave without any cut in their wages i.e. they get paid during the leave also. This leave is generally provided for taking care for another family member, giving birth and looking after baby, recover from illness etc.

These paid leaves incur a huge cost, but it is not a burden on employer or the government because it is financed through the employee payroll tax, these taxes are mainly collected for this purpose only.

At first the impact of an employee payroll tax is same as other taxes which are to be paid by the employee, but after wards these effects are minimized when they get paid leave. So the impact of a payroll tax can be -

• A decrease in the disposable income of the employee - With the reduction of the tax amount from the employee's salary decreases the amount of income left with him to spend in goods and services.
• This may bring the level of aggregate demand to a lower level.
• But this tax has a good impact at the time of paid leave, because if it would have been a non-paid leave than during this time the level of aggregate demand would have gone even lower.
• This tax is like an insurance premium paid for which we get the return when we are in need of it.

The impact of an employee payroll tax may seem negative at the beginning but if it is used to finance the paid leave program than in the long run it has a very good impact on employee as well as whole economy.