The incidence of payroll taxation: Evidence from chile

1. The incidence of payroll taxation:Evidence from chile 09级劳动经济学 张素蓉

2. 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?

3. Traditional View: (w0, E0) TO (W1, E1) The incidence : elasticity of DL and SL

4. Summers(1989): • Tax/benefit linkage: • Where: • We get: • Three conditions where full shifting happens: • Elastic demand • Inelastic supply • Full tax-benefit linkage( q = 1 & a = 0)

5. 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

6. 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

7. 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)

9. Model

11. 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

14. Model Problem: 1) Recession in the 1980s: wage decreased dramatically, unemployment increased, high inflation(25%) Employers were mandated to give an 18% nominal wage rise due to the “privatization 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)/dtewould NOT be zero!

15. Model • DDD: difference-in-difference-in-difference

17. 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

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

21. Conclusion • No consequences for labor market efficiency from financing social insurance through payroll taxation in this specific case • limit applicability because • High inflation • Downward rigidity for wages • what causes the full shifting?

22. Thanks!