Transcript Payroll taxes - unibocconi.it

Payroll taxes
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
What are we talking about?
• Payroll taxes = income taxes & social
security contributions
• Payroll taxes drive a wedge between labor
costs and net wage
• Social security – deferred consumption
(public pensions)
• Incidence of taxation is relevant
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Overlaps with other institutions
• Family policies
• Unemployment benefits
• Unions
• Active labor market policies
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Outline
1.
2.
3.
4.
5.
6.
Measures and cross-country comparisons
Theory
Empirical evidence
Policy issues
Why do payroll taxes exist?
Review questions
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Measures
•
•
•
•
•
•
Average tax rate
Marginal tax rate
Marginal effective tax rate
Progressive tax system
Social security: employer – employees
Tax systems are complex – impossible to
summarize by one particular number
• Include VAT?
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Cross-country comparison
• Average production worker wage (APW): annual
gross wage earnings of adult, full-time manual
workers in manufacturing sector
• Average payroll tax rate: 17.2 (Korea) – 55.4
(Belgium)
• Marginal tax rate: 22.8 (Mexico) – 76.9 (Hungary)
• Most countries (except Sweden and Turkey):
marginal tax rates substantially higher than
average tax rates – progressive tax systems
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Cross-country comparison II
Effects tax-benefit system on net income of
various types of workers:
• Household net incomes of working lone parents
higher than net incomes of working singles
• Sometimes for one-earner couple with two
children net income higher than gross income
• Single worker net income during initial phase of
unemployment: 25% (Australia) – 66%
(Luxembourg)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Cross-country comparison III
Changes in labor market position:
• Single earner from inactivity to 67% of APW –
marginal tax rate sometimes more than 100%
• One spouse 67% APW other moves from
inactivity to 33% APW; marginal effective tax
rate: 7% (Korea) to 89% (Denmark)
• Polarization work-rich and work-poor families:
– Neither is working – big disincentives
– One is working – substantially smaller incentives
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Theory
Theory –
effect on functioning labor market
1. Presence of taxes – not necessarily
2. Structure of taxes – yes
Labor supply – extensive & intensive margin
Labor demand – increase in costs
• Wedge
• Competitive markets: tax paid by
worker/employer – slopes demand &
supply curves
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Theory
Perfect labour market
w
Ls
B
wd
A
Tax
w0
ws
C
Ld
L1
L0
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
L
Tax cut
w
Ls
Tax
Reduction
B
w1
A
w0
Ld 2
Ld 1
L0
L1
L
When Labour Supply is rigid..
W
LS
w0  w1 (1  t )
t
w1
LD
e0  e1
LD’
E
When Labour Supply is more
elastic than Demand …
W
LS
w1 (1  t )
t
w0
w1
LD’
LD
e0
e1
E
Theory
Theory –
non competitive labor market
Pissarides (1998) 3 possibilities:
1. Wage bargaining between unions and firms
2. Wage bargaining between individual firms and
unemployed workers (search models)
3. Efficiency wages
Role of tax structure (progressive vs. proportional)
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Collective Bargaining
Labor supply curve  wage-setting equation – slope
increases. Workers use their market power to
take most of a decrease in taxes
Unemployment as disciplining device for
encompassing (co-ordinated) unions –
centralized bargaining. When taxes increase,
wage claims are reduced, flatter wage setting
equation
More so when taxes are less progressive: more
effects on employment. Only with proportional
taxes (and UBs taxed) no effects on employment
Search models
• Transaction costs and rents related to search
frictions. Some unemployment is efficient.
• If benefits are fixed and taxed like wages,
then no effects on employment. Only on
wages.
• Otherwise effects like a change in
unemployment benefits
Efficiency wages
• Higher wages/unemployment are required to
discourage shirking: disciplinary device
• In a standard Shapiro-Stiglitz setting, once
satisfied the No-Shirking condition, the supply is
rigid: only labour demand shifts in this case.
• Taxes change wages but not employment
• Progressiveness of taxation is also not relevant in
this case. Only the size of the wedge matters as in
the competitive model
Empirical evidence
Empirical evidence
• Labor supply of men not much affected by
changes in tax rates
• Labor supply of women increases if net wage
increases
• 4 groups of workers where high taxes may affect
behavior: in work with high incomes, in work with
low incomes & eligible for benefits, those nearing
retirement and those considering entrance into the
labor force
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Empirical evidence
Box 4.1 The incidence of payroll taxation
Gruber (1997)
Change of financing social insurance in Chile in
1981: from payroll tax for manufacturing firms to
general revenues. Payroll taxes drop from 29% to
5.5%
% effect
Wages
Employment
Blue collar
-0.9
0.2
White collar
-1.4
-0.2
Reduced payroll taxes fully passed on to wages
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issue 1:
Negative income taxes or inwork benefits?
Policy issues
Means-tested welfare system: welfare is
reduced one for one when individual starts
making money; alternatives
1. NIT: initial level benefits lower, withdrawn
with a percentage
2. IWB: individuals only receive benefits if they
work – phase-in & phase-out range
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issues
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issues
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issue 1:
Negative income taxes or inwork benefits?
Policy issues
• IWB: stimulate labor supply at extensive margin –
reduce incentives at intensive margin
• NIT: adverse effects on labor supply along
extensive margin
• Optimal system depends behavioral response of
individuals:
– Mostly along intensive margin: NIT
– Mostly along extensive margin: IWB
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issues
Box 4.2 In-work benefits in action
Card and Hyslop (2005)
Canadian Self Sufficiency Project - % on income assistance
Years Control
0.5
90.8
No permanent
effects
Program
83.1
Effect
7.7
1
2
3
4
83.7
73.0
65.4
56.7
72.4
63.3
58.8
53.5
11.3
9.7
6.6
3.2
5
5.75
50.6
45.0
48.4
45.0
2.2
0.0
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issues
Policy issue 2:
Tax credits or wage subsidies?
• Provided to firms. Influence hiring
decisions
• Wage subsidy = direct transfer
• Both: hire specific categories of workers
• Tax credits need no separate administration
• Dead-weight losses
• Subsidizing marginal employment =
difficult to use in practice
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Policy issues
Why do payroll taxes exist?
• Funding government expenditures
• Social security contribution parts directly
related to the functioning of labor markets
• Contribution to public pension programs:
tax or savings?
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Review questions
1. How do in-work benefits affect incentives
of unemployed workers?
2. Why does the impact of taxes depend on
the nature of the labor market?
3. What is the trade-off between wage
subsidies and tax credits?
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.