I agree that the ultimate incidence of a payroll tax will be spread across employees, customers. shareholders, and suppliers of other inputs. However, I think that employees suffer from money illusion. That is, a reduction in wages or benefits in the short or medium run will have a negative effect on morale and hence productivity. This is why, in hard economic times, employers will lay some workers off, rather than slightly lower wages/ benefits for all and keep all employed.patriot1 wrote:[My view is that the demand function for labour depends on the total cost to the employer, who doesn't really care what the breakdown is between nominal salary, payroll tax, or benefits. Thus a payroll tax can't make labour cost to the employer more expensive - only a change in the supply / demand functions will do this. A higher payroll tax will result in other components of the total labour cost being pared back, as Shakes has noted.
By contrast, a machine does not suffer from money illusion.
But you're right: increased automation is a secondary problem. A bigger problem is increased outsourcing to jurisdictions where labour is cheaper.
George