The incidence of payroll taxation evidence from chile
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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

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The incidence of payroll taxation: Evidence from chile

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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

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?


The incidence of payroll taxation evidence from chile

Traditional View:

(w0, E0) TO (W1, E1)

The incidence :

elasticity of DL and SL


The incidence of payroll taxation evidence from chile

  • 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)


The study of incidence is important

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

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

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)


Model

Model


Model1

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


Model2

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!


Model3

Model

  • DDD: difference-in-difference-in-difference


Model4

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


Model5

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


Conclusion

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?


The incidence of payroll taxation evidence from chile

Thanks!


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