Payroll Tax Reduction Research Articles

The task ahead for Labour if it came to power

The task ahead for Labour if it came to power

Green Tax Reform and Employment Double Dividend in Australia Should Australia Follow Europe’s Footsteps? A CGE Analysis

Australia has one of the highest per capita carbon emissions, and its energy sector contributes significantly to the country’s carbon emissions. Renewable energy and climate change call for a shift from fossil fuels to low-carbon technologies for energy production. Policies aiming to reduce carbon emissions are perceived by many people as leading to higher living costs, but changes in energy policies can also lead to economic gains in the presence of revenue recycling. This article applies a computable general equilibrium approach to study the effect of energy tax in the Australian economy. Four different scenarios of green tax reform (GTR) are simulated to test the employment double dividend (EDD) potential. All four scenarios simulate changes in energy tax and one of four tax revenue recycling policies including (a) value added tax reduction, (b) payroll tax reduction, (c) goods and services tax (GST) reduction and (d) a mixture of all three recycling policies. The results show strong EDD potential of GST and payroll tax reduction when used along with energy tax in a revenue-neutral GTR approach. The study also presents a comparison of an optimal EDD inducive policy design between the European and Australian GTR approaches. JEL classifications: H23, C68, H21, Q48

The Macroeconomic Effects of Trade Policy

We study the short-run macroeconomic effects of trade policies that are equivalent in a friction-less economy, namely a uniform increase in import tariffs and export subsidies (IX), an increase in value-added taxes accompanied by a payroll tax reduction (VP), and a border adjustment of corporate pro.t taxes (BAT). Using a dynamic New Keynesian open-economy framework, we summarize conditions for exact neutrality and equivalence of these policies. Neutrality requires the real exchange rate to appreciate enough to fully offset the effects of the policies on net exports. We argue that a combination of higher import tariffs and export subsidies is likely to trigger only a partial exchange rate offset and thus boosts net exports and output (with the output stimulus largely due to the subsidies). Under full pass-through of taxes, IX and BAT are equivalent but VP is not. We show that a temporary VP can increase intertemporal prices enough to depress aggregate demand and output, even when wages are sticky. These contractionary effects are especially pronounced under fixed exchange rates.

<div>Switching from Payroll Taxes to Corporate Income Taxes: Firms’ Employment and Wages after the 2012 Colombian Tax Reform</div>

The 2012 Colombian tax reform reduced payroll taxes and employer contributions to health insurance by 13.5 percent, while also increasing corporate income taxes and leaving untouched the benefits to workers financed through these taxes. Shifting taxation from formal employment to other business activities is a policy recipe under heated discussion in Latin America. The reform offers an ideal laboratory for studying empirically the potential distortions against formal employment associated with payroll taxes in contrast to other taxes on firms. We analyze the impact of the reform on employment and wages using monthly firm-level data on all formal employment in nonpublic firms in the country and a difference-in-differences approach that takes advantage of the fact that a few sectors were exempt from the 2012 tax reform. We find a positive average effect of 4.3 percent on employment and 2.7 percent on average firm wages, for the average firm. The employment effect is found only for micro and small firms, whereas the bulk of the employment is concentrated in medium and large firms, which show no significant effect. According to these estimates, about 145,000 new jobs were created between January and May of 2015 by virtue of the reform. These results are generally supportive of efforts to reduce payroll taxes, though our findings on employment are less robust than those on wages, and large firms do not seem to have benefitted. The apparent lack of effect for medium and large employers is also a source of concern. We speculate that it may be due to these firms’ being more sensitive to the increase in corporate taxation that financed the reduction in payroll taxes, but lack of access to the relevant data prevents us from offering solid evidence regarding this hypothesis.
 JEL Codes: H25, H32

Taxation and consumption: evidence from a representative survey of the German population

ABSTRACTUsing a representative survey of the German population, this article studies self-reported individual consumption responses to a recent exogenous payroll tax reduction. About 55% of the respondents report that they spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic covariates of consumption responses suggests, among other effects, that interest rates are related to consumption responses to tax changes, and that households with higher income have a higher propensity to consume.

Taxation and Consumption: Evidence from a Representative Survey of the German Population

Using a representative survey of the German population, this paper studies self-reported individual consumption responses to a recent payroll tax reduction. About 55 percent of the respondents report that they spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic covariates of consumption responses suggests, among other effects, that interest rates are related to consumption responses to tax changes, and that households with higher income have a higher propensity to consume.

The Transitory Effects of Payroll Tax Reduction on Employment Stability: Evidence from Spain.

The aim of this study is to analyze the effects of payroll tax reductions that promote permanent contracts as opposed to fixed-term to increase job stability. Traditionally, the effects are studied from the point of view of worker characteristics. However our perspective is that the characteristics of firms may have an influence on the effects of payroll tax reduction on job stability. The data used come from the 2005 Continuous Work History Sample (CWHS). The database includes administrative records from the Social Security system with the entire labor history of 1.2 million people (around 4% of all affiliated workers) and some information about the firms such as economic sector, size, legal status, tenure, region, public or private ownership or national or international capital. We find out a positive effect of payroll tax reduced contracts on the probability to remain employed during the year after the contract have been signed, that turns negative in the following years. Consequently, the effects of payroll tax reduction are positive in the short term but negative in a longer term.

The Finnish Payroll Tax Cut Experiment Revisited

In this paper I evaluate the effects of a regional experiment that reduced payroll taxes by 3–6 percentage points of the firms’ wage sum in northern and eastern Finland. I estimate the effect of the payroll tax reduction on firms’ employment levels, wage sum and profits, and on workers’ hourly pay and monthly hours worked, by comparing the changes in employment and wages before and after the start of the experiment to a control region. My results indicate that the reduction in payroll taxes did not lead to any unequivocal aggregate effects in the target region.

Chinese entrepreneurs

PurposeThis article aims to investigate motivations, success factors, problems, and business‐related stress of entrepreneurs in small‐ and medium‐sized enterprises and relates them to the success of the Chinese entrepreneurs.Design/methodology/approachA total of 196 entrepreneurs in Beijing, Shanghai, and Guangzhou were randomly selected for a survey, which was analyzed to determine motivations, success factors, problems, and business‐related stress by gender. Ordered logit models were applied to motivation and success factors.FindingsResults showed that 68 percent were male and 32 percent female. The average age of the entrepreneurs was about 32 years old and time devoted to their business was almost 45 hours per week. Of the total respondents, 56 percent were married and 44 percent single. When asked to indicate their motives for business ownership, these entrepreneurs suggested that increasing income, becoming their own boss, and to prove that they can succeed were the most important reasons. Reputation for honesty, providing good customer services, and having good management skills were reported to be necessary conditions for business success. Friendliness to customers and hard work were also critical for high‐performance enterprises. Among the problems encountered by entrepreneurs, unreliable/undependable employees were the most critical. Intense competition and lack of management training also proved to be great challenges for Chinese entrepreneurs.Practical implicationsPolicy makers can strengthen its small business entrepreneurs by promoting the factors that lead to entrepreneurs' success, such as the ability to manage personnel and management skills through business outreach services provided by universities, government agencies, and nonprofit organizations. In addition, the government has the ability to simplify the tax system, and reduce payroll taxes. Technical assistance in areas such as market research, human resources management, and technological support should be provided to small business owners.Originality/valueThis study applied to Chinese entrepreneurs in addition to an extensive analysis of the factors that affect motivations, success, problems, and business stress.

Household incidence of pollution control policies: A robust welfare analysis using general equilibrium effects

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-level data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation (OBA) of permits; (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT); (iii) and the use of these proceeds to reduce consumption taxes instead (UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis suggests that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and poverty dominates for any poverty line (and thus welfare dominates) at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases significantly more with OBA and RPT than with UCS.

Social Security, Benefit Claiming and Labor Force Participation: A Quantitative General Equilibrium Approach

We build a general equilibrium model of overlapping generations that incorporates endogenous saving, labor force participation, work hours, and Social Security benefit claims. Using this model, we study the impact of three Social Security reforms: 1) a reduction in benefits and payroll taxes; 2) an increase in the earliest retirement age, to sixty-four from sixty-two; and 3) an increase in the normal retirement age, to sixty-eight from sixty-six. We find that a 50 percent cut in the scope of the current system significantly raises asset holdings and the labor input, primarily through higher participation of older workers, and reduces the shortfall of the Social Security budget through a reduction in early claiming. Increasing the normal retirement age also raises saving and the labor supply, but the effects are smaller. Postponing the earliest retirement age has only a negligible effect. When the projected aging of the population is taken into account, the case for a reform that encourages labor force participation of the elderly appears to be much stronger.

Wage Effects of Non-Wage Labour Costs

We study short- and long-term wage effects of two important elements of non-wage labour costs: firing costs and payroll taxes. We exploit a reform that introduced substantial reduction in these two provisions for unemployed workers aged less than thirty and over forty five years. Theoretical insights are gained with a matching model with heterogeneous workers, which predicts an ambiguous effect on wages: firing costs are expected to increase wages, because they increase the bargaining power of workers, while the effect of payroll taxes is negative. Difference-in-differences estimates, which account for the endogeneity of the treatment status, suggest that decreased firing costs and payroll taxes have a positive overall short-term effect on wages – and also on unemployment. We find larger effects for older than for younger workers and for men than for women. Calibration and simulation of the model shows that about fifty percent of the predicted cumulative increase on wages takes place during the first year of the reform. Our simulations also show that the increase in wages is mostly due to the reduction in payroll taxes, while the overall effect of firing costs is nil because direct and indirect effects of firing costs offset each other.

Subsidizing Job Creation in the Great Recession

We analyze the effects of various labor market policies on job creation, job destruction, and employment. The framework of Mortensen and Pissarides (2003) is used to model the dynamic interaction between firms and workers and to simulate their responses to alternative policies. The equilibrium model is calibrated to capture labor market conditions at the end of 2009, including the unemployment, inflow, and outflow rates by workers of different educational attainment. We consider the equilibrium effects of a hiring subsidy, a payroll tax reduction, and an employment subsidy. While calibrating parameters that characterize these policies, we try to mimic the policies in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. We find that a hiring subsidy and a payroll tax deduction, as in the HIRE Act, can stimulate job creation in the short term, but can cause a higher equilibrium unemployment rate in the long term. Employment subsidies succeed in lowering the unemployment rate permanently, but the policy entails high fiscal costs.

Output-Based Emissions Allowances and the Equity-Efficiency Trade-Off

Emissions trading with output-based allocation (OBA) of emissions allowances is gaining popularity as a means to address sectoral equity issues related to the use of market-based instruments in pollution control. Using a dynamic general equilibrium framework, this paper assesses the potential equity-efficiency trade-off between OBA and alternative emissions trading systems, with special attention to the heterogeneity among energy-intensive industries. Because abatement is achieved at a higher marginal cost with OBA, it is less efficient than emissions trading systems in which permit revenues are used to reduce payroll taxes. Nonetheless, the implicit output subsidy in OBA improves the distributional outcome of the abatement policy to the benefit of energy-intensive industries as a whole. The simulation results also suggest that energy-intensive industries that do not produce energy would be the main beneficiaries of OBA. In the new carbon-constrained environment, energy intensive industries that produce energy could not benefit significantly from OBA.

The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction

This paper evaluates the costs to households of a carbon dioxide (CO₂ cap-and-trade program. We find important variation in the distribution of costs of the policy across 11 regions of the country and across income deciles. The introduction of a price on CO₂ emissions is regressive, but this may be outweighed by the distributional effects of CO₂ emissions allowances. We evaluate five alternatives for returning any revenues from auctioning emissions allowances—three are progressive (expansion of the Earned Income Tax Credit and two cap-and-dividend approaches), while the others are either neutral (a reduction in payroll taxes) or amplify regressivity (a reduction in the income tax). Regional differences are most substantial for low-income households.

Can a carbon permit system reduce Spanish unemployment?

This paper analyses the impact of carbon policy on unemployment in Spain and whether recycling the public revenues earned from permit auctions can alleviate this problem. While Spain's deviation from the European Union's intermediate emission goals is more serious than most other member countries' unemployment in Spain is also well above average for the European Union. We use a computable general equilibrium model that includes unemployment in the markets for unskilled and skilled labour. We find that introducing carbon permits does not aggravate Spanish unemployment. In fact, if supplied with revenue recycling schemes, unemployment rates may actually fall. Contrary to other European studies, we find that the best option is to reduce payroll taxes on relatively skilled types of labour. This reform is successful in both increasing labour demand and dampening the supply response to rising wages. However, while all of the recycling schemes generate dividends in terms of aggregate welfare, none entirely offsets the abatement costs.

Do Remittances Have a Flip Side? A General Equilibrium Analysis of Remittances, Labor Supply Responses and Policy Options for Jamaica

Econometric analysis has established a negative relationship between labor supply and remittances in Jamaica. The authors incorporate this ex-post evidence in a general equilibrium model to investigate economywide effects of increased remittance inflows. In this model, remittances reduce labor force participation by increasing the reservation wages of recipients. This exacerbates the real exchange rate appreciation, hurting Jamaica's export base and small manufacturing import-competing sector. Within the narrow margins of maneuver of a highly indebted government, the authors show that a revenue-neutral policy response of a simultaneous reduction in payroll taxes and increase in sales taxes can effectively counteract these potentially negative effects of remittances.

Employment and wage effects of a payroll-tax cut—evidence from a regional experiment

In this paper, we evaluate the effects of a regional experiment that reduced payroll taxes by 3–6 percentage points for 3 years in northern Finland. We match each firm in the target region with a similar firm in a comparison region and estimate the effect of the payroll tax reduction by comparing employment and wage changes within the matched pairs before and after the start of the experiment. According to our results, the reduction in the payroll taxes led to an increase in wages in the target region. The point estimates indicate that the increase in wages offset roughly half of the impact of the payroll tax cut on the labor costs. The remaining labor cost reduction had no significant effects on employment.

Household Incidence of Pollution Control Policies: A Robust Welfare Analysis Using General Equilibrium Effects

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-level data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation of permits (OBA); (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT): (iii) and the use of these proceeds to reduce consumption taxes instead (UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis allows us to conclude that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and poverty dominates for any poverty line (and thus welfare dominates) at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases significantly more with OBA and RPT than with UCS.

The Buffett Plan for Reducing the Trade Deficit

This paper considers a plan proposed by Warren Buffett, in which importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods. Exporting firms could then sell certificates to importing firms on an organized market. In this paper, starting from a relatively neutral projection of all major variables for the U.S. economy, we estimate that the plan would raise the price of imports by approximately 9 percent, quickly reducing the current account deficit to about 2 percent of GDP. We discuss several problems that might arise with the implementation of the Buffett plan, including possible instability in the price of certificates and retaliation by U.S. trade partners. We also consider an alternative version of the Buffett plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes. We report the results of simulations of the alternative plan's effects on macroeconomic balances and GDP growth. Notably, the alternative plan would lessen the severity of the growth recession expected in our base projection.