Payroll Tax Research Articles

A policy for the jobless youth in South Africa

This paper uses survey and tax administrative data to analyse the effects of a sizeable employer-borne payroll tax credit for young, low-wage workers in South Africa. We find fairly limited impacts of the wage subsidy on the employment of young, low-wage workers relative to two comparison groups: slightly older, low-wage workers and slightly higher-paid, young workers. We find evidence of increases in low-wage youth entry into employment, but these are too small to affect overall employment. However, the female employment rate has increased, and unemployment among women has dropped because of the policy. We find evidence to suggest that the policy has led to a rise in earnings, particularly for men and those earning around the maximum subsidy value.

Do political connections pay? Evidence of corporate payroll tax planning in Chinese firms

ABSTRACT Drawing on a dataset of listed Chinese firms, our study reveals a notable reduction in effective payroll tax rates for politically connected firms. Using China’s anti-corruption campaign as an exogenous shock, our difference-in-differences (DID) analysis indicates a significant increase in the effective payroll tax rates of politically connected firms after the campaign. Well-developed legal institutions, social security fund holdings, and high-quality external audits mitigate the effect of political connections on a firm’s effective payroll tax rates. These results are instrumental in regulating firms’ payroll tax payments from an informal institutional perspective.

Payroll tax incidence: Evidence from unemployment insurance

Economic models assume that payroll tax burdens fall fully on workers, but where does tax incidence fall when taxes are firm-specific and time-varying? Unemployment insurance in the United States has the key feature of varying both across employers and over time, creating the potential for labor demand responses if tax costs cannot be fully passed through to worker wages. Using state policy changes and administrative data of matched employer–employee job spells, I study how employment and earnings respond to unexpected payroll tax increases for highly exposed employers. I find significant drops in employment growth driven by lower hiring, and minimal evidence of pass-through to earnings. The negative employment effects are strongest for young workers and single-establishment firms.

Can revenue collection for public funding in health care be progressive? An assessment of 29 Countries

Most research on health care equity focuses on accessing services, with less attention given to how revenue is collected to pay for a country's health care bill. This article examines the progressivity of revenue collection among publicly funded sources: income taxes, social insurance (often in the form of payroll) taxes, and consumption taxes (e.g., value-added taxes). We develop methodology to derive a qualitative index that rates each of 29 high-income countries as to its progressivity or regressivity for each of the three sources of revenue. A variety of data sources are employed, some from secondary data sources and other from country representatives of the Health Systems and Policy Monitor of the European Observatory on Health Systems and Policies. We found that countries with more progressive income tax systems used more income-based tax brackets and had larger differences in marginal tax rates between the brackets. The more progressive social insurance revenue collection systems did not have an upper income cap and exempted poorer persons or reduced their contributions. The only pattern regarding consumption taxes was that countries that exhibited the fewest overall income inequalities tended to have least regressive consumption tax policies. The article also provides several examples from the sample of countries on ways to make public revenue financing of health care more progressive.

The labor effects of R&D tax incentives: evidence from VC-backed startups

Abstract We evaluate the impact of the Protecting Americans from Tax Hikes (PATH) Act of 2015, which allowed some existing venture-capital-backed startups to monetize their research and development (R&D) tax credits against payroll taxes in the United States. We show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment. These effects are stronger among startups that are financially constrained. Marginally eligible startups subsequently recruit workers with more education and experience and file more patents with new inventors. Our findings suggest payroll tax credits are effective in scaling startups and stimulating R&D activities through skilled labor recruitment.

The Relation between Payroll and Income Tax Avoidance

ABSTRACT Payroll taxes, such as contributions mandated through the Federal Insurance Contributions Act (FICA), are a considerable expense for businesses and a large source of government revenue. Despite the significant cost, little is known about the determinants of payroll tax avoidance. By misclassifying employees as independent contractors, firms can avoid their portion of FICA contributions and other employee-related costs. This paper uses publicly available Wage and Hour Division (WHD) compliance action data from the U.S. Department of Labor (DOL) to identify employee misclassification and examine whether firms that avoid income taxes also avoid payroll taxes. This study documents two main results. First, firms with higher CashETR, indicating lower income tax avoidance, are more likely to have Fair Labor Standards Act (FLSA) violations detected during a WHD audit. Second, firms increase their CashETR following the discovery of FLSA violations, indicating a reduction in income tax avoidance. Data Availability: The data that support the findings of this study are available from the U.S. Department of Labor's Wage and Hour Division. JEL Classifications: H25; H26; K31; K34.

Household Health Care Payments Under Rate Setting, Spending Growth Target, and Single-Payer Policies

Households have high burden of health care payments. Alternative financing approaches could reduce this burden for some households. To estimate the distribution of household health care payments across income under health care reform policies. Cross-sectional study with microsimulation used nationally representative data of the US population in 2030. Civilian, noninstitutionalized population from the 2022 Current Population Survey linked to expenditures from the 2018 and 2019 Medical Expenditure Panel Survey and 2022 National Health Expenditure Accounts were included. Rate regulation of hospital, physician, and other health care professional payments equal to the all-payer mean in the status quo, spending growth target at 4% annual per capita growth, and single-payer health care financed through taxes. Household health care payments (out-of-pocket expenses, premiums, and taxes) as a share of compensation. The synthetic population contained 154 456 records representing 339.5 million individuals, with 51% female, 7% Asian, 14% Black, 18% Hispanic White, 56% non-Hispanic White, and 5% other races and ethnicities (American Indian or Alaskan Native only; Native Hawaiian or other Pacific Islander only; and 2 or more races). In the status quo, mean household health care payments as a share of compensation was 24% to 27% (standard error [SE], 0.2%-1.2%) across income groups (median [IQR] 22% [4%-52%] below 139% of the federal poverty level [FPL]; 21% [4%-34%] for households above 1000% FPL [11% of the population]). Under rate setting, mean (SE) payments by households above 1000% FPL increased to 29% (0.6%) (median [IQR], 22% [6%-35%]) and decreased to 23% to 25% for other income groups. Under the spending growth target, mean (SE) payments decreased from 23% to 26% (SE, 0.2%-1.2%) across income groups. Under the single-payer system, mean (SE) payments declined to 15% (0.7%) (median [IQR], 4% [0%-30%]) for those below 139% FPL and increased to 31% (0.6%) (median [IQR], 23% [3%-39%]) for those above 1000% FPL. Uninsurance fell from 9% to 6% under rate setting due to improved Medicaid access, and to zero under the single-payer system. Single-payer financing based on the current federal income tax schedule and a payroll tax could substantially increase progressivity of household payments by income. Rate setting led to slight increases in payments by higher-income households, who financed higher payment rates in Medicare and Medicaid. Spending growth targets reduced payments slightly for all households.

ONLINE PAYROLL SYSTEM

Abstract- The HR and Payroll Management System is a web-based application developed by Nadient Technology Pvt Ltd. This system aims to automate the process of generating and distributing monthly pay slips for employees, as well as managing employee information efficiently. It is designed to replace manual salary slip issuance and HR management systems. The specific functionalities of an HRPMS can vary depending on the software provider. However, some common features include: Employee Database: A centralized repository for storing all employee data, including contact information, demographics, job details, salary information, and benefits enrollment. Payroll Processing: Automates payroll calculations, deductions, and taxes. Pay slip Generation: Generates and distributes pay slips electronically or in paper format. Time and Attendance Tracking: Tracks employee hours worked, overtime, and leave. Benefits Administration: Manages employee benefits enrollment and deductions. Performance Management: Tools for setting goals, tracking performance, and conducting performance reviews. Reporting and Analytics: Provides reports and analytics on HR and payroll data.

Financing universal health care: Premiums or payroll taxes?

This paper presents a stochastic overlapping generations model with endogenous health investment to study the transition from the existing hybrid health insurance system in Germany towards a uniform system, financed by either funded or unfunded premiums or payroll taxes.Our simulation results highlight the insurance properties of payroll taxes, but also their cost in terms of labor supply distortions and moral hazard. We find that compulsory deductibles decrease aggregate welfare in Germany, although they reduce moral hazard and increase private health investment. Reform models with premiums also induce precautionary behavior and increase labor supply, but at the same time increase exposure to productivity risk. Since the introduction of a funded system is costly for transitional cohorts, unfunded premiums provide the highest efficiency gains in our framework.

The Consequences of Income Tax Subsidies: Evidence from the Restaurant Industry

ABSTRACT I examine the consequences of the implementation of the 45B Credit, an employer payroll tax subsidy (administered as an income tax credit) intended to encourage honest wage reporting for tipped employees. I find evidence suggesting that wage reporting for tipped employees increased following the implementation of the 45B Credit. I also find evidence suggesting that this credit influenced investment and economic performance. Specifically, I find that 45B Credit firms increased investment and experienced greater profitability and growth compared to non-45B Credit restaurant firms. Overall, these findings suggest that the implementation of the 45B Credit had important intended and unintended consequences. This study provides insights into the relation between firms, industries, and tax subsidies, which should be useful to lawmakers when reviewing the net benefits of this tax subsidy and other tax subsidies in the future. Data Availability: Data used from publicly available sources.

THE FACTORS OF DEVELOPMENT OF THE IT-SECTOR IN TIMES OF ECONOMIC INSTABILITY: THE EXAMPLE OF HUNGARY AND BULGARIA

The article presents the results of a study of the dependence of the annual turnover of the IT segment in Hungary and Bulgaria on groups of factors with the definition of the most influential groups for each country separately. The analysis of the IT/ITC sectors of the countries in terms of economic efficiency and the quantitative indicator of companies is presented in general. An indicator of the dimension of companies for each of the countries is also presented. The main indicator of the financial efficiency of companies for both countries was the annual turnover of companies. Three main areas were classified as groups of influence: tax rates, educational component indicators, and labor force indicators. Tax rates were considered under three main types: corporate tax, payroll tax, and social contributions. The educational component as a group of factors was divided into two subgroups: the quantitative characteristics of students, graduates, and education costs. The group of labor force factors was based on analyzing the number of employees in IT/ITC and company-level staff costs. Based on correlation regression and vector autoregression, each influencing factor group was analyzed when creating optimal models. Based on econometric analyzes and tests (for example, the Granger test), systems of factors influencing the performance indicator of technological companies in Hungary and Bulgaria were derived.

Markov equilibrium of social security: An analytic solution under CRRA utility and the future of social security

The politico-economic sustainability of pay-as-you-go social security has been studied with the help of two-period overlapping generation models under Markovian equilibrium concepts. The literature has mostly used logarithmic utility for tractability, whereas versions under the more general isoelastic CRRA utility have only been analyzed computationally. This paper demonstrates that a prototypical social security model under CRRA utility has a closed-form solution; it revisits previously obtained computational conclusions and presents new findings and extensions. Quantitatively, the model can explain the observed path of payroll tax rates in the USA and predicts increased tax rates as the equilibrium response to lower future population growth rates. The model predicts a gradual increase in tax rates, from the current 12.4% to about 15% or so in 2060, and then staying at that level. Benefits are expected to decrease slowly, by about 2% (or less) per decade, starting in 2030.

Employer-Sponsored Health Insurance Premium Cost Growth and Its Association With Earnings Inequality Among US Families

Costs of employer-sponsored health care benefits have increased faster than workers' wages for several decades, with important implications for disparities in earnings and wage stagnation. To quantify how growth in employer-sponsored health insurance (ESI) premiums may have been associated with reduced annual wages, disparities in earnings by race and ethnicity and wage level, and wage stagnation among US families with ESI. In this economic evaluation, serial cross-sectional analyses were performed of US families receiving ESI from 1988 to 2019 based on data from the Consumer Expenditure Survey, Kaiser Employer Health Benefits Survey, US Census Bureau's Current Population Survey, and federal payroll taxation rates. Statistical analysis was conducted from February 2022 to July 2023. Percentage of annual compensation associated with health care premiums (after accounting for tax deductibility) and lost wages associated with growth in cost of premiums from 1989 to 2019 based on 1988 compensation. To assess disparities, analyses were stratified by race and ethnicity and wage level. In 1988, 44.7 million individuals (head of household: mean [SD] age, 43.3 [13.1] years; 30.1% were female; and 2.4% identified as Asian, 6.2% as Hispanic, 8.6% as non-Hispanic Black, and 82.8% as non-Hispanic White) were covered by ESI family plans; this number remained similar in 2019 at 44.8 million individuals (head of household: mean [SD] age, 47.1 [12.9] years; 41.3% were female; and 1.3% identified as Asian, 9.9% as Hispanic, 9.9% as non-Hispanic Black, and 78.9% as non-Hispanic White). In 1988, the mean (SD) household size was 3.3 (1.3) people, and in 2019, it was 3.4 (1.3) people. If ESI costs had remained at the same proportion of the 1988 average compensation package, then in 2019, the median US family with ESI could have earned $8774 (95% CI, $8354-$9195) more in annual wages. During all 32 years, health care premiums as a percentage of compensation were greater for non-Hispanic Black and Hispanic families than for non-Hispanic White families. By 2019, 13.8% (95% CI, 13.5%-14.1%) of compensation among non-Hispanic White families with ESI went to premium costs compared with 19.2% (95% CI, 18.8%-19.7%) among non-Hispanic Black families and 19.8% (19.3%-20.3%) among Hispanic families with ESI. In 2019, health care premiums as a percentage of compensation at the 95th percentile of earnings for families with ESI were 3.9% (95% CI, 3.8%-4.0%) compared with 28.5% (95% CI, 27.8%-29.2%) at the 20th percentile of earnings. From 1988 to 2019, the mean cumulative lost earnings associated with growth in health care premiums for the median US family with ESI was $125 340 (95% CI, $120 155-$130 525) in 2019 dollars, 4.7% of earnings over the 32-year period. This economic evaluation of US families receiving ESI suggests that 3 decades of increasing health care premiums were likely associated with reduced annual earnings and increased earnings inequality by race and ethnicity and wage level and were meaningfully associated with wage stagnation.

Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

Unstable government revenues in uncertain times: which taxes are especially volatile?

Motivation: External shocks affect the performance of economies. This is especially true recently after COVID-19 pandemics and ongoing war in Ukraine. States struggle to maintain their revenues in order to avoid skyrocketing public debts. Yet, especially now, governments face challenges connected with high uncertainty of inflows from the taxes.Aim: The aim of the article is improvement in understanding of the variability of government revenues sourced from selected taxes binding in the EU Member states as well as the potential reasons for their fluctuations.Results: The calculations are made based on empirical data for EU Members states for the period 1996–2021. There are ten taxes that were considered — both those of key importance for budgets in most jurisdictions as well as some sectoral or specific more niche levies. Study is executed with usage of statistical tools that include calculation of coefficient of variation, modified trend curve estimation with use of Hodrick–Prescott filter, correlation of such trend with empirical data, comparison of coefficient of variation for empirical data with numbers produces by Hodrick–Prescott filter and two-way ANOVA without replications, while controlling for the states. Corporate income taxes, Excise duty as well as most specific and sectoral taxes that include Taxes on capital transfers, Car registration taxes, Taxes on insurance premiums or Tax on lotteries, gambling and betting are generally characterized by greater variability in terms of revenues they provide than Payroll taxes, Real estate taxes or Value added taxes. Due to insufficient research in previous studies in this respect, findings presented in this article may provide for a useful hint for policymakers in further design of optimal tax system that would provide for stable and predictable sources of income to the government.

Using payroll taxes as a redistribution tool

Payroll taxes are usually designed to fund social insurance and not to contribute directly to redistribution. Over the last fifty years, France has modified dramatically the schedule of payroll taxation, turning it into the most progressive part of its tax system. Using administrative data and detailed microsimulation model of labor income taxation, we show that pretax wage (or labor cost) inequality measured by the P90/P10 ratio has increased by 15.4%, while net wage inequality has actually decreased by 18.9% over the 1967–2019 period. This reduction in wage inequality can be largely attributed to the policy mix of reductions of employer payroll taxes for low wage earners joined with minimum wage increases. We discuss whether this unusual French experiment carries lessons for other countries.

The Financial Impact of State Tax Regimes on Local Economies in the U.S.

We examine the complex relationship between taxes and local economies at the county level. Specifically, we explore the impacts of different types of state-level taxes, including income and payroll taxes, property and other taxes, as well as sales tax, on key economic performance indicators. Our study aims to comprehensively analyze how state-level taxation influences entrepreneurship, innovation, labor markets, and overall economic growth in local communities. The findings consistently demonstrate that taxes harm local economies, although the magnitude of the impact varies depending on the specific type of tax. Notably, a 10 percent increase in income and payroll taxes leads to a 3 percent drop in the nonfarm proprietors employment rate, 0.3 fewer patents per 1000 people, and a USD 3000 decrease in GDP per capita. A similar tax hike in sales taxes results in a 4.5 percent decline in the nonfarm employment rate and a 0.2 patent reduction per 1000 people. Property and other taxes also harm the economy: a 10 percent increase is linked to a 5.3 percent fall in the nonfarm proprietors employment rate, a 7.5 percent rise in local unemployment, and a USD 55,000 drop in regional GDP per capita.

Means testing and Social Security in the United States

AbstractThis paper uses a heterogeneous‐agent overlapping‐generations model to examine the fiscal and distributional consequences of introducing a means test in US Social Security. I find that a means test, that is, conditioning benefit payments on a household's earnings or assets, leads to a higher implicit tax on old‐age resources, but has desirable distributional effects. A 75% cut in the benefits to households with earnings of more than 200% of the median leads to a 2.3% reduction in the overall size of Social Security, but has almost no effect on average dollar benefits. In contrast, a fiscally comparable payroll tax cut leads to an across‐the‐board decline of 2% in the average dollar benefits, despite an increase in capital and labor. A fiscally comparable delay in the benefit eligibility age increases benefits for all, but negatively affects capital and labor. Finally, an asset‐based means test causes a decline of 1% in the average dollar benefits, but has a large negative effect on capital and the accidental bequests left behind by deceased households.

Age-dependent risk aversion: Re-evaluating fiscal policy impacts of population aging

The existing literature on fiscal unsustainability in the United States often evaluates three alternative policies: increasing the payroll tax rate, reducing pension benefits, and extending the retirement age. Studies suggest that reducing the replacement rate and increasing the retirement age provide higher welfare for future generations. However, these studies often assume constant risk aversion (CRA), which contradicts the empirical evidence that suggests risk aversion tends to increase with age. To provide a more comprehensive understanding of risk aversion, life-cycle behavior, and welfare under uncertainties, this study integrates age-dependent increasing risk aversion (IRA) into an overlapping generations model with risk-sensitive preferences. The quantitative analysis shows that individuals who exhibit IRA tend to adjust hours worked to reduce income risk and accumulate more precautionary savings to ensure future consumption. However, reducing uncertainty consumes resources that could otherwise have been used to increase overall consumption and leisure. Individuals who expect to become more risk averse in old age may prefer an increase in the payroll tax rate over the other two options, as the latter would result in relatively higher uncertainty.

Globalisation, taxation and inequality

AbstractToday's tax systems, in which value‐added taxes and payroll taxes play a prominent role, are largely creations of the 1950s. We need to invent modern tax systems adapted to the reality of the 21st century: the growing importance of capital and the rise of inequality. This article reviews some of the challenges involved with increasing the progressivity of tax systems in a globalised world and discusses how these challenges could be overcome. I make the case for new and more ambitious forms of international cooperation and for modern forms of wealth taxation.