This is a tale of two people who opened a pizza parlor and learned to their chagrin that a mandated benefit is really a tax.
It is a story related by Professor William O. Dunkelberg, who is also dean of Temple University's School of Business and Management, in an effort to make clear that taxes and mandated benefits carry similar burdens.The term "mandated benefits" is one of those euphemisms used to avoid the stigma of the terrible "T" word, and that suggests it could get a workout during an administration pledged to no tax increases.
The partners scrape together $20,000 and enough other financing to get into operation. They employ 20 people the first year and manage to take home $15,000 each, enough to stay in business rather than working for someone else.
Since there are a large number of pizza places, it soon becomes clear they cannot make much more than $15,000 each because of the competition. So, each year they settle for $15,000 each.
Then, suddenly, they are required to provide health insurance for the 20 workers, most of whom are young and already covered by family insurance. This costs $500 a year for each employee, or a total of $10,000 a year.
At the end of the year, therefore, the two partners have earned only $10,000 each to support their families. Something must be done; a conference is held.
They consider closing shop and working for someone else, but that would mean firing 20 employees. They could be content with $10,000 each. They could cut wages. They could raise prices.
They decide to raise prices. So do their competitors, who are faced with the same situation. However, it becomes clear that at higher prices people buy less pizza. They are forced to fire an employee. Their competitors do likewise.
As a result, at the end of the year they are nearly able to restore their $15,000 salaries. In effect, their customers and the employees who lost their jobs paid for the mandated benefits. Somebody had to.
The market might have reduced the cash pay of all pizza workers so that the cash, plus the new health benefits, would have equaled the old wages.