Employer payroll taxes and money wage behaviour

In the past ten years tax incidence theory has made a number of strides. Terminology has become standardized, assumptions have been made explicit, and a two sector, two factor, I static general equilibrium model to study incidence questions has been developed and elaborated. Rather than review these developments in any detail, it is sufficient here to note a sampling of these writings, namely the works of MUSGRAVE (1959, Ch. 10), HARBERGER (1962), MIESZKOWSKI (1967), MCLURE (1971) and MEISZKOWSKI'S (1969) summary of this litera-ture. ^{1 1} The models under consideration are essentially short run in nature. For present purposes the works of KRZYZANIAK (1968, 1970) on long run incidence are not being considered. View all notes

A central theme in this literature has been to emphasize the importance of relative price changes in the determination of tax incidence. At the same time it plays down the importance of the direction of shifting (forward or backward) which had been a prominent feature of earlier partial equilibrium incidence analysis. One purpose of the present paper is to argue that in actual empirical situations it is necessary to consider the behaviour of absolute prices in determining the incidence of a specific tax, the employer payroll tax.

There are four parts to the paper. Part I reviews the general equilibrium model and its conclusions on payroll tax incidence. The implications of forward shifting, backward shifting and payment of payroll taxes by employers are discussed in Part II. Results of a test for back-ward shifting of the tax in US manufacturing are reported in Part III. Part IV contains conclusions.

Two conclusions emerge from the analysis. (I) In the general equilibrium models under consideration the employer payroll tax is borne by labour. However, care must be taken in applying this conclusion to a real world situation where transfer payments are a component of family income. (2) Empirical tests in US manufacturing do not support the idea that the I employer tax is shifted totally backward onto money wages.