Increase In Payroll Tax Research Articles

Asymmetric responses to income changes: The payroll tax increase versus tax refund in 2013

We examine low-to-middle income individuals’ responses to the 2013 payroll tax increase and their 2012 tax refund and find that consumption declines 90 cents per dollar lost to the tax increase, and rises 60 cents per additional tax refund dollar.

Sustainable social security: Four options

Four options to make the social security sustainable under the coming demographic shift are presented; increase payroll taxes by 6 percentage points, reduce replacement rates by one-third, raise the normal retirement age to 73, or means-test the benefits and reduce them in income. The paper accounts for labor supply at both intensive and extensive margins and analyzes welfare effects across agents that differ in age, wealth and cohorts. While the four policies all achieve the same goal, economic outcomes differ significantly. Options to curtail benefits encourage own savings and capital accumulation, while the payroll tax increase and the means-test reduce work effort. Future generations prefer options to reduce benefits, but current generations prefer to finance the transition with payroll taxes.

Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece

This article analyzes the response of earnings to payroll tax rates using a cohort-based reform in Greece. Individuals who started working on or after 1993 face permanently a much higher earnings cap for payroll taxes, creating a large and permanent discontinuity in marginal payroll tax rates by date of entry in the labor force for upper earnings workers. Using full-population administrative social security data and a regression discontinuity design, we estimate the long-term labor supply effects and incidence of payroll tax rates on earnings. Standard theory predicts that in the long run, new regime workers should bear the entire burden of the payroll tax increase (relative to old regime workers). In contrast, we find that employers compensate new regime workers for the extra employer payroll taxes but not for the extra employee payroll taxes. We do not find any evidence of labor supply responses along the extensive or intensive margins around the discontinuity, suggesting low efficiency costs of payroll taxes. We discuss various possible explanations for those results.

Will Cutting the Payroll Tax Increase Jobs? (Empirical Evidence from the EU VAT)

Red Ink Rising, the Peterson–Pew Commission on Budget Reform’s report presents the country with a fiscal/employment dilemma – Congress must act immediately to stem the federal debt, but it must move carefully lest it harm employment in the fragile economy. In short, we must act fast and slow – we must decrease the debt and increase employment. This is a difficult task. The Peterson-Pew dilemma (notably its jobs-creation aspect) was taken to heart by both of the reform commissions that issued reports soon thereafter (National Commission on Fiscal Responsibility and Reform, The Moment of Truth and The Debt Reduction Task Force (Domenici/Rivlin), Restoring America’s Future). The dilemma also appears to be have played a role in President Obama’s compromise with the Republican leadership in the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 (P.L. 111-312) – particularly the 2% payroll tax cut enacted at section 601. The Congressional Budget Office (CBO) places the payroll tax at the intersection of the policies that Peterson-Pew examines. Empirical evidence from the EU suggests that P.L. 111-312 got it right (as between general reductions in the employees’ and employers’ payroll taxes). The evidence gathered in a two-year policy experiment conducted in nine EU Member States also suggests that the CBO estimates of employment gains from employers’ payroll tax cuts cannot be supported (if they are targeted generally). In addition, EU macro-economic simulations based on these findings also suggest that the best way to use payroll tax incentives to increase employment is to use them to directly reduce the cost of labor. This can be accomplished either (1) under mechanisms used in the HIRE Act or (2) by targeting specific categories of workers (the unemployed) for an employees’ payroll tax cut that would be tethered to (used in conjunction with) an employers’ tax incentive to significantly reduce the cost of labor. This paper endeavors to bring EU analysis into the US payroll tax debate. Five options are considered: •(1) Employers’ payroll tax holiday. •(2) Employees’ payroll tax holiday. •(3) Targeted employers’ payroll tax holiday. •(4) Targeted employees’ payroll tax holiday. •(5) Tethering an employers’ payroll tax holiday to a targeted employees’ payroll tax holiday.

Sustainable Social Security: Four Options

This paper presents four policy options to make Social Security sustainable under the coming demographic shift: 1) increase payroll taxes by 6 percentage points, 2) reduce the replacement rates of the benefit formula by one-third, 3) raise the normal retirement age from sixty-six to seventy-three, or 4) means-test the benefits and reduce them one-to-one with income. While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means-testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.

The Incidence of Payroll Taxes in Ontario and Quebec; Evidence from Collective Agreements for 1985-2007

This study uses an original data set, combining information for all collective agreements covering more than 500 employees signed in Quebec or Ontario from 1985 to 2007 and information on payroll taxes and other variables, to measure the incidence of an increase in payroll tax. The results of this model show that that after one year, a one percentage point increase in the general payroll tax reduces wages growth by 1/2 of a percentage point in Quebec and 3/10 of a point in Ontario.

Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece

This paper analyzes the response of earnings to payroll tax rates using a cohort-based reform in Greece. All individuals who started working on or after 1993 face permanently a much higher earnings cap for payroll taxes, creating a large and permanent discontinuity in marginal payroll tax rates by date of entry in the labor force for upper earnings workers. Using full population administrative Social Security data and a Regression Discontinuity Design, we estimate the long-term incidence and effects of marginal payroll tax rates on earnings. Standard theory predicts that, in the long run, new regime workers should bear the entire burden of the payroll tax increase (relative to old regime workers). In contrast, we find that employers compensate new regime workers for the extra employer payroll taxes but not for the extra employee payroll taxes. We do not find any evidence of labor supply responses around the discontinuity, suggesting low efficiency costs of payroll taxes. The non-standard incidence results are the same across firms of different sizes. Tax incidence, however, is standard for older workers in the new regime as they bear both the employee and employer tax. Those results, combined with a direct small survey of employers, can be explained by social norms regarding seniority-based pay which create a growing wedge between pay and productivity as workers age.

Mitigating America's demographic dilemma by pre-funding social security

Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes, which crowd out savings and slow real wage growth below the rate of technological progress. A faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them. Addressing the financing problem by reducing Social Security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees. By contrast, a pre-funding of Social Security financed with consumption taxes more evenly spreads the welfare losses across generations, and it helps future generations, especially the poor, by stimulating capital formation.

New Estimates of the Incidence of the Payroll Tax

The purpose of this study is to take a somewhat different look at the issue of the shifting of the payroll tax for Social Security (OASDHI) than has been done in the previous literature. The novel aspects are: 1) We concentrate only on the degree to which workers' earnings are affected by the share of the tax paid by employers; 2) We base the study on data describing the behavior of individuals rather than the more aggregated units (industries or entire economies) that have been used in other studies;' 3) Finally, the nature of our data allows us to study the dynamics of the process of tax shifting and thus discover how rapidly, as well as how much of, any payroll tax increase is shifted back onto workers.