|BACK | HOME | NEXT
6. THE TAXMAN GIVETH AND THE TAXMAN TAKETH AWAY
Economists consider overtime premiums to be a kind of tax, the proceeds of which go to the employee instead of to the government. It may come as a surprise that those "proceeds" end up being a negative sum, after deduction of income tax from the worker's overtime pay. After taxes, the worker receives less in take home pay and benefits from working an hour overtime than from working a regular hour.
Here is why: almost all of the overtime compensation is taxable as income while a substantial portion of regular compensation is in tax exempt benefits. Furthermore, the worker would have already applied personal deductions and other tax credits on the earnings from straight-time work. And, as the worker's income moves into a higher tax bracket, the tax on the overtime pay is at a higher rate than the average paid on the straight-time income. My calculations (using Canadian tax rates and deductions) suggest that, over a wide range of incomes, the worker gets to keep about 85 percent as much of overtime pay and benefits as of regular pay and benefits.
But there is another consideration that distorts the comparison of overtime pay and regular compensation. Governments undoubtedly adjust tax rates to recover the revenues they have forfeited by giving a tax exemption for fringe benefits. The exemption is, after all, a tax expenditure that, unless it is matched by new sources of revenue or cuts in government services, will result in a fiscal deficit. A familiar parallel is when pubs offer a "free lunch" and incorporate the cost of the food in the price of the beer. The free lunch is not really free but is a compulsory purchase tied to the purchase of beer.
So, not only do premium pay for overtime and generous fringe benefit packages represent a trade off in exchange for relaxing the limit on work time, their worth is greatly exaggerated. In the fun house mirror of gross earnings and tax-exempt benefits, the rewards of working long hours appear substantial. After taxes have cut that gross down to size, a bewildered and resentful worker is left to contemplate shrunken remains of his hard-earned pay. 
6. There is another wrinkle, if we consider Trejo's argument that employers adjust the regular wage downward to compensate for the overtime premium. Where such wage adjustments occur, the employer is, in effect, setting up a fund to withdraw a small percentage each hour from regular pay and then pay back the balance from that account during overtime hours. Under such an arrangement, the premium that the worker receives during overtime should properly be credited as a deferred payment from straight-time earnings. [return to text]
|BACK | HOME | TOP OF THIS PAGE | NEXT