Abstract
Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.
Highlights
Social security tax incidence on firms is a classical yet on-going debate in public economics
China provides an interesting case for such an inquiry because: 1) its every-growing economy is pillared by its massive labour force, distortive effects of social security taxes can have huge and widespread impacts on the economy; 2) China’s personal income tax is minor, its social security tax rate is of the highest in the world, which causes heavy burden on firms’ business; 3) The Chinese social security administration is decentralized and province-based, each province has the discretion to adjust the collection entity or the enforcement intensity, which provides necessary variation for policy evaluation
Since difference collection entity only affects the difference in enforcement capacity and efficiency which only interfere with the effective social security rate but does not influence other labour demand choices, this study argues the difference in social security collection entity can be used as the proxy variable for the unobserved enforcement and the instrumental variable of the effective social security tax rates
Summary
Social security tax incidence on firms is a classical yet on-going debate in public economics. Drawing on China’s above-scale manufacturing firms’ annual survey, this study finds that wages in the provinces using the local tax bureau are significantly lower by 3.08 percent. Employments in these provinces are significantly higher by 5.26 percent, suggesting that higher social security tax rate, caused by more intensive enforcement, causes certain cost-effect that lowers wages but promoting the employment. To examine the causal impact of China’s social security taxes on employment and wages at the firm-level, the rest of this study is organized as follow: the second part discusses data, variables, and the empirical strategy; the third part implements OLS and IV regression; the fourth part investigates the heterogeneity; the final part concludes
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More From: International Journal of Economic Behavior and Organization
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