The incidence of payroll taxation: Evidence from chile

The incidence of payroll taxation:Evidence from chile

09级劳动经济学张素蓉

Background

Fact: the increase in payroll taxation burden… OECD countries: 19% to 25% from 1965-88 Sweden: 6% to 40% by the late from 1950 - 1970s Critique: increase labor cost, lower competitiveness,

lead to unemployment? Question: Is payroll tax really a cost for employers? Or, does payroll tax certainly lead to labor market

efficiency?

Traditional View:(w0, E0) TO (W1, E1)

The incidence :elasticity of DL and SL

Summers(1989):Tax/benefit linkage:

Where:

We get:

Three conditions where full shifting happens:1) Elastic demand2) Inelastic supply3) Full tax-benefit linkage( q = 1 & a = 0)

The study of incidence is important

• If full shifting exists, employer bears no increase in labor cost and there’d be no disemployment( No resulting labor market inefficiency)

• The incidence of payroll tax is subject to empirical studies!

• Reality is complicated: the minimum wage shifting may not be possible

The incidence of payroll taxation• past evidence is mixed… Brittain(1972):full shifting Holmlund(1983): 50% shifted

• problem: omitted variable bias “wage” –complicated other mechanism: the structure is strongly correlated with the structure

of its tax system(Summer, Gruber and Vergara, 1993)

• variance among states within a country Gruber(1991): insurance for workplace injuries – 80% shifted Gruber(1994): childbirth insurance – full shifting Concern: 1) value these two insurance more 2) more able to shift 3) US

specific

Natural experiment: privatization of social security program in chile

• Social security system in Chile: including pension, sickness/maternity, work injury, unemployment, family allowance

• different payroll tax rates for “white-collar” and “blue collar”• covered 60% labor force and 84% in manufacturing sector• privatization: all but work injury• government reimbursement for family allowance taxes after privatization• data: survey of manufacturing plants in Chile over 1979-1986 firm-level data( employees > 10)

Before 1981 After 1981

Pay-as-you-go Fully funded

employer 30% 5%

employee 17% 25%

Financing Employer’s contribution General revenue

Model

Model Basic regression specification:

Cross-sectional regression: difference in difference

Average difference estimator: the difference of the average over the 1979-1980 period and the 1984-1985 period

Model Problem:

1) Recession in the 1980s: wage decreased dramatically, unemployment increased, high inflation(25%)

2) Employers were mandated to give an 18% nominal wage rise due to the “privatization

3) The confounding influence of employee contributions: reduction in tax rate causes an increase in employee’s contribution

w may include employee’s contribution, when (dw/w)/dte would NOT be zero!

Model DDD: difference-in-difference-in-difference

Model Potential bias:spurious variation: bias toward full shifting

measurement error in wage bill - toward full shifting

measurement error in tax payments – toward no shifting

maximum taxable earnings – toward full shifting

missing variable: variation in industry risk

membership in different social security institutions

uncontracted hiring

Model

IV: Within-plant instrumental variables instrumented by the other group’s tax rate for each plant Grouping instrumental variables strategyinstrumented with the average tax rate for the industry or area groups for each plant

Conclusion

• No consequences for labor market efficiency from financing social insurance through payroll taxation in this specific case

• limit applicability because1) High inflation2) Downward rigidity for wages3) what causes the full shifting?

Thanks!