High Payroll Taxes Research Articles

Are Taxes Turning Humans into Machines? Using Payroll Tax Variation to Estimate the Capital-Labor Elasticity of Substitution.

This paper provides the first quasi-experimental estimate of the micro capital-labor elasticity of substitution. We use a discontinuity in the average payroll tax rate to show that firms decrease both labor and capital when experiencing higher payroll tax rates. We argue that this is consistent with Leontief production functions, implying a micro capital-labor elasticity of substitution of zero. Using a conceptual framework to aggregate micro elasticities, we estimate a macro capital-labor elasticity of substitution of 0.17. Our finding sheds new light on the role of the substitution of labor with capital in the fall of labor shares and on the fiscal externalities imposed by payroll taxes.

What are the Main Obstacles to Hiring after Recessions in Europe?

This paper assesses the relative importance of perceived obstacles to hiring workers on a permanent basis faced by EU firms and studies how they depend on firm’s characteristics. Findings suggest that the main obstacles to hiring in Europe are high uncertainty, shortage of skilled labour, high payroll taxes, high wages and the risks associated with changes to labour laws. While negative (firm-level) demand and finance shocks negatively affect firms’ perceptions of obstacles to hiring, labour market structures and firms’/employees’ characteristics are also found significant. In particular, our analysis shows that firms employing a higher percentage of skilled, permanent and experienced workers report fewer hiring obstacles. In contrast, firms under collective wage bargaining arrangements seem to report these obstacles more often. However, there are also some specific obstacles to hiring where this is not the case, which suggests that firm-level characteristics should also be taken into account when designing labour market policies. Finally, our analysis provides further tentative evidence on the impacts of labour market reforms, which seem to have a potential to address impediments towards employment creation in the EU.

On financing retirement with an aging population

A problem that faces many countries including the United States is how to finance retirement consumption as the population ages. Proposals for switching to a saving‐for‐retirement system that does not rely on high payroll taxes have been challenged on the grounds that welfare would fall for some groups such as retirees or the working poor. We show how to devise a transition path from the current U.S. system to a saving‐for‐retirement system that increases the welfare of all current and future generations, with estimates of future gains higher than those found in typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income‐weighted average marginal tax rates used in our analysis. Retirement taxation Social Security Medicare E13 H55 I13

The Behaviour of French Firms During the Crisis: Evidence from the Wage Dynamics Network Survey

In coordination with the ECB and 24 other national central banks of the European Union, the Banque de France interrogated 1150 French firms to understand how the crisis affected their economic environment and their human resources practices during the 2010-2013 period. A majority of workers were employed by firms which indicate that their activity was mostly affected by a decrease in demand considered as long-lasting by more than 40% of them, especially in the construction sector and among small firms. In contrast, less than 20% of firms (weighted by their employment) report that the unavailability of credit had an effect on their activity. Over the period, despite the economic downturn, the amount of total costs increased for 70% of firms (weighted by their employment) mainly through an increase in labour costs and secondly in the cost of supplies. In particular, base wages continued to increase for a large share of firms, suggesting strong downward wage rigidities. Many firms indicate substantial difficulties in adjusting the labour force: throughout the crisis it became more difficult to hire qualified employees, to adjust working hours or to move workers to different job positions. The joint presence of difficulties in finding employees and unemployment growth suggest that structural unemployment increased in France in recent years. Other factors considered as significantly constraining for employment growth by a large majority of firms are uncertainty about economic conditions, risks that labour laws are changed, high payroll taxes and firing costs.

Social Security Taxation and Compliance: The Chinese Evidence

We study how payroll tax rate affects compliance in China’s social security system, using natural within-city variations in statutory payroll tax rate over time for identification. Higher payroll tax rate reduces probability of participation in the social security system and ratio of taxable salary to total labor compensation. Elasticity of participation with respect to net-of-payroll tax rate is 0.31 and close to zero, and elasticity of taxable salary ratio 0.39 and 0.82 from individual and firm data respectively. The relative size of elasticities from the firm and individual analyses suggests that firms fail to register all their employees, particularly migrant workers. Indeed, we find that firms in regions with a relatively larger migrant population tend to underreport more in response to the payroll tax rate. Larger domestic private and foreign-owned firms show more compliance.

Outsourcing and Labor Taxation in Dual Labor Markets

We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.

Outsourcing and Labor Taxation in Dual Labor Markets

We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.

Labor Markets in EU8+2: From the Shortage of Jobs to the Shortage of Skilled Workers

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This labor demand growth has given rise to skill shortages and associated wage pressures, often amplified by out-migration. However, employment/working age population ratios are relatively low. In contrast to the earlier period of weak labor demand it is now the supply side of the labor market that constrains new job creation. Many persons of working age are economically inactive in EU8+2 either because they lack skills demanded by employers, or because of labor supply disincentives, such as early retirement benefits, high payroll taxes, or limited opportunities for flexible work arrangements. Hence the main challenge facing now EU8+2 is to mobilize labor supply to meet the demand. Addressing the emerging skills shortages is particularly important, because failure to do so will constrain to job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers. The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries. The objective of this paper is to document the recent changes in labor market conditions in EU8+2, to suggest some tentative explanations for the observed trends and patterns, and to recommend policies to address the emerging challenges.

Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax

America's aging coupled with high and growing old-age health and pension benefits augers for much higher payroll taxes, with damaging effects on the U. S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model. The FairTax, which proposes to replace the federal payroll, personal income, corporate income, and estate tax with a progressive consumption tax, offers a potential alternative to this dismal economic future. According to our simulation model, these policy changes would lead to major improvements in the U.S. capital stock, long-run real wages and the well-being of the majority of Americans.

Structural Unemployment: How Important Are Labour Market Policies and Institutions?

Les differences de taux de chomage entre les pays de l’OCDE ont souvent ete interpretees comme etant la preuve de l’importance des institutions et des politiques de main d’oeuvre. Cet argument est fonde (plus souvent en Europe mais aussi au Canada) sur le fait que les taxes elevees sur le salaire, les reglementations de main d’oeuvre rigides et les ententes syndicales inadaptees augmentent les couts du travail et que les programmes genereux d’aide sociale reduisent les motivations a travailler. Cet article passe en revue les recherches empiriques internationales qui evaluent les impacts de ces politiques de main d’oeuvre sur le chomage et ensuite considere ces resultats dans un contexte canadien. Les resultats suggerent que l’effet des differentes institutions et politiques de main d’oeuvre sur le chomage n’est pas aussi simple que l’on ne le pensait. Selon les preuves empiriques et depuis les reformes des 15 dernieres annees, il est difficile de supporter l’hypothese que les hauts niveaux de chomage au Canada sont causes principalement par un marche du travail inflexible, ce dernier provenant de nos institutions et de nos politiques. En derniere analyse, une explication credible du chomage au Canada doit regarder au dela de l’assurance-chomage, des taxes, des syndicats et des lois sur la main d’oeuvre. The variation in unemployment rates across OECD countries has often been interpreted as clear evidence that labour policies and institutions matter a great deal. The basis of this argument (most frequently applied to European countries but also to Canada) is that high payroll taxes, rigid labour regulations, and unresponsive union contracts inflate the cost of labour and that generous welfare programs reduce work incentives. This paper reviews the international empirical research evaluating the unemployment impacts of these labour policies and then considers the results in the Canadian context. The results suggest that the effect of different labour market policies and institutions on unemployment is by no means as simple as the conventional wisdom suggests. At any rate, after the reforms of the past 15 years, it is hard to argue on the basis of the empirical evidence that relatively high levels of unemployment in Canada are primarily due to labour market inflexibility resulting from our policies and institutions. In the final analysis, a credible explanation for Canada’s unemployment record must look beyond unemployment insurance, taxes, unions, and labour law.

Tax reform for low-wage workers.

As a result of the recent implementation of work-oriented antipoverty programs, more welfare recipients can be expected to be working in low-wage jobs. With these jobs there is little hope that these workers' incomes will rise above the poverty level. One way to help support these low-wage workers is through tax reform. Although low-wage workers pay little or no federal tax, they still pay high payroll and local taxes. To help such workers keep more of their earnings, refundable taxes like earned income tax credit and child refund taxes should be expanded, and sales taxes on food should be eliminated.

Taxation, Public Policy, and Dynamics of Unemployment

This paper provides an overview of the key issues relating to taxation, public policy and the dynamics of unemployment.It takes issue with the widely held view that generous social insurance schemes and the associated highpayroll taxes have been the major cause of the high unemployment rates which have persisted in Europe over thepast 15 years. It puts forward a framework for a theory of adjustment, based on the portfolio theory of the riskaverse firm and the efficiency wage theory of labor markets. This is used to explain why in the onset of a downturn,the hiring rate may lag the layoff rate, thus giving rise to rising unemployment rates. It is also shown to provideguidance as to policies which enhance the ability of firms to bear risks and which reduce costs of hiring and firing.The paper argues that while policies which increase severance or layoff costs may be well intended they mayactually serve to exacerbate the magnitude of employment fluctuations. Similarly, unemployment compensation,which is designed to ease the burden on those who are unemployed, may lead to higher levels of equilibriumunemployment. These programs can be restructured in ways which simultaneously ease the short-run burden ofthose thrown into unemployment, while reducing the adverse impact of these programs on the unemployment rate.

The United States Needs a Health System Like Other Countries

To the Editor. —Dr Glaser 1 believes that market-based approaches to health care reform will not succeed and, therefore, that the United States should adopt an all-payer, payroll-tax-financed health system. However, he fails to note many of the drawbacks and limitations of this proposal. First, as with all payroll taxes, his plan is fundamentally regressive and thus, to many, unfair. Enacting a new payroll tax to finance health care would result in both high and low wage earners' paying the same tax rates for health care. Second, higher payroll taxes will force the price of labor up. Employers will have to absorb some of these new costs, but most of them will be passed on to employees. As a result, adopting an all-payer system will lead to higher levels of unemployment, to more business failures, and to reductions in wages. Some econometric models predict that adopting a modest 7% payroll

The Case for Extending Social Security Coverage to Government Employees

This paper recommends extending social security to government employees in order to (1) improve the degree of equity in the system by treating civil servants the same as most other income-earning individuals by requiring them to contribute an amount to social security consistent with their total earnings, (2) prevent highincome government pensioners from also receiving social security benefits that are intended for the poor, (3) improve the long run solvency of the social security trust fund, (4) eliminate an incentive that distorts labor mobility and encourages individuals to work in the public sector, and (5) help Congress measure the public appetite for social security benefits and taxes. The exemption of nearly all federal employees and many state and local government employees from the social security system cannot be justified. This paper supports the thesis that social security coverage should be extended to government employees on the grounds of fairness and economic efficiency. In addition, the contention is made that by substantially increasing payroll tax revenues in the short run and providing some improvement to the trust fund balances in the short and long run, extending coverage would allow immediate cuts in payroll taxes while at the same time maintaining the present character of the system. Extending coverage is not a long run substitute for financing alternatives, such as higher payroll taxes, general revenue financing, or reducing benefit levels; rather, it is a method of providing Congress sufficient time to deal with the pressing long run issues and a means of improving economic efficiency and fairness of social security, a system comprising 26 percent of the federal budget. Potential For Extension of Social Security In 1980, about 90 percent of all wages and salaries will be covered by the social security system, but coverage will vary substantially by sector. Table I displays the ratios of covered and taxable earnings used by the Social Security Administration in estimating 1980 payroll tax revenues [ 18]. Not all wage and Mickey D. Levy holds the M.P.P. degree from the Graduate School of Public Policy, University of California, Berkeley. He has published in the National Tax Journal. Mr. Levy is a Research Associate at the American Enterprise Institute for Public Policy Research. The views expressed in this paper do not represent the views of the American Enterprise Institute. Special thanks is given to Marvin Phaup and Peter Karpoff of the Congressional Budget Office. An anonymous referee made many thorough and helpful suggestions for which the author is grateful.

Social Mythology and Reform: Income Maintenance for the Aged

Debate over the need for reform of Social Security is reviewed in this article. Even prior to recent developments, reformers have attacked the myth that Social Security is closely analogous to private insurance, and they have argued that payroll tax financing—adopted and sus tained in order to foster the illusion of a contributory system—is highly, and unnecessarily, regressive in its impact. Supporters of the system as originally conceived point to its success in terms of size, broad political acceptance and effectiveness in reducing poverty among the aged. The recent major changes in the system, culminating in the 1972 Social Security Amendments, are reviewed. It is argued that these changes sharpened the debate. Higher benefits required higher payroll taxes—thereby raising, in the reformers' eyes, the price of the insurance myth—paid primarily by low income workers. The creation of the Supplementary Security Income program appears to make income redistribution features of Social Security redundant. Defenders of the system resist the reformers' suggestions for tidying up the structure. Suggested reforms will, they argue, strip the system of the mystique of contributory social insurance and saddle Social Security with the stigma of a welfare-like, means-tested system; in such a case, they argue, the system will become vulnerable to political conflict. They maintain that social myth is necessary cement in the construction of durable social institutions.