Two-sector perspectives on the effects of payroll tax cuts and their financing

This paper analyzes the consequences of lifting from labor some of the burden of taxation in a life-cycle two-sector setup where a consumption good is produced alongside a capital good. The analysis focuses on the implications of alternative ways of financing payroll tax cuts in closed and small-open neoclassical economies. In our models payroll tax cuts do not necessarily stimulate hours worked in the stationary state. We show, for example, that in the closed economy –paradoxically– long-run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation. If instead government purchases of the capital good (or government labor services) are decreased, manhours are left unchanged in the long-run, while capital formation is spurred. In the small-open economy it is only if the offsets are a fall in entitlement spending or a rise in the wealth tax that aggregate manhours are increased —otherwise steady state hours worked are invariant.     

Aggregate supply management in a small open economy

For a closed economy a cut in either payroll or income taxes stimulates output, but they influence the price level in different directions. In a two-sector, small open economy these conclusions are much more tenuous. Using a model that maintains equilibrium in the only two purely domestic markets, labor and nontradeables, it is established that a payroll-tax cut increases the size of the labor force, but does not guarantee higher real income. For either tax cut, prices and output move in opposite directions. In the short run when wages are “sticky,” an income-tax cut has the undesirable effect of increasing unemployment. In the face of a supply shock that reduces demand for labor, a payroll-tax cut can reestablish the original equilibrium.     

Labour Taxation in a Unionised Economy with Home Production

The impact of payroll taxes on unemployment and welfare are examined in a model with household production and union–firm wage bargaining. The analysis shows that unemployment typically falls as the payroll tax rate in the market sector for household substitutes (the service sector) is reduced. This holds even when the payroll tax rate in the non-service sector is raised in order to maintain a balanced government budget. Welfare improves with a reduced-service-sector payroll tax rate only if unions are equally strong and firms are equally labour intensive across the sectors.
JEL classification : E 24; H 21; J 22; J 51     

Optimum income taxation and layoff taxes

This paper analyzes optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed).     

Ad‐valorem tax incidence and after‐tax price adjustments: evidence from Brazilian basic basket food

Abstract Recent empirical work on tax incidence suggests that after‐tax price responses are independent of the tax change direction. This paper investigates asymmetric price responses to ad‐valorem tax changes in the Brazilian food market for 10 goods in 16 states during the period 1994–2008. Our results suggest that when tax rates increase, tax full shifting occurs for 2 of the 10 goods and tax overshifting occurs for one of the 10 goods; the price response to tax cuts is an undershifting for all goods. Moreover, this last result is similar to our estimation of (average) tax incidence (undershifting). We also investigate the short‐term and long‐term relationships between prices and VAT rate parameters and find that prices seem to respond to tax shocks within four months.     

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.     

Anti-Stagflationary Tax Cuts and the Problem of Investment*

If prices are affected by both cost-push and demand-pull factors then a change in the policy mix towards fiscal ease can improve output, employment and the balance of trade without the price level rising. However the policy change may reduce investment and so affect the intertemporal allocation of resources. This paper derives conditions for tax cuts to ameliorate inflation and unemployment without a sacrifice of future output. Numerical examples suggest that one can have no presumption that the conditions are or are not likely to hold in general. The discussion is related to Corden's recent analysis of a 'free lunch'.     

Taxes,Strikes and Wages

A union and a firm bargain about wage increases. The firm possesses private information about its revenues. A two-period screening model is used to derive equilibrium wage demands by the union and to calculate measures of strike activity. Changes in wage demands and dispute probabilities due to alterations in various taxes are analysed. A more progressive income tax, a lower level of income taxes and higher payroll taxes reduce wages and strike activity. Hence, tax policy can be used not only to affect wages and employment, but lso to influence strike incidence.     

A Search Model of Unemployment and Inflation*

This paper introduces money into the standard labor‐matching model. A double‐coincidence problem makes money necessary as a medium of exchange. In the long run, a rise in the growth rate of money leads to higher inflation and higher unemployment, such that the long‐run Phillips curve is not vertical. The optimal monetary growth rate decreases with greater worker bargaining power, the level of unemployment benefits, and the payroll tax rate.     

THE IMPACT OF TAX PRICE CHANGES ON CHARITABLE CONTRIBUTIONS TO THE NEEDY

Eliminating or reducing the federal charitable deduction can have serious impacts on the level of charitable donations. Tax price elasticity estimates from a multivariate sample selection model indicate that changing the deduction to a 12% tax credit would have reduced individual donations in 2012 by 18.9% if applied to itemizing taxpayers and by 10.5% if extended to nonitemizers. Elimination of the deduction would have led to a 35% reduction in individual charitable donations. Even if coupled with cuts in marginal tax rates, eliminating the charitable deduction will still likely result in substantial reductions given the inelastic income elasticities of charitable donations. The estimates justify the ardent opposition of many in the nonprofit sector to the more radical proposals for changing the tax treatment of charitable contributions. (JEL D34, C34)     

SOCIAL SECURITY DEPENDENT BENEFITS,NET PAYROLL TAX,AND MARRIED WOMEN'S LABOR SUPPLY

This paper examines how Social Security dependent benefits impact the labor supply of married women aged 25–54. Specifically, I investigate whether the decrease in the rate of return to women's work discourages them from participating in the labor force by simulating expected net payroll tax rates and dependent benefits. Dependent benefits may reduce the net return to women's work, as they usually pay the full payroll tax without receiving marginal benefits for additional earnings if they claim benefits based on their husbands' earnings records. The results show that high net payroll tax rates reduce married women's work incentives, particularly those near retirement age. (JEL H24, H55, J22)     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

THE SIGNIFICANCE AND USE OF LONG-RANGE ACTUARIAL COST ESTIMATES FOR THE SOCIAL SECURITY SYSTEM

This paper describes the methodology underlying the actuarial cost estimates for the Social Security program and the assumptions needed therefor. With this as a background, the use to which these estimates is made in developing legislation is described, with emphasis on the current financing problems. Finally, various possible solutions to these problems are discussed. These solutions involve either increasing the income of the program or decreasing the rate of growth of its outgo. Increased income could be derived by increasing the payroll tax rates, by injecting general revenues (either directly or indirectly, such as taxing Social Security benefits and putting the proceeds in the trust funds or financing part of all of the Hospital Insurance program from general revenues and moving some of its payroll tax rate to the cash-benefits program), or by covering government employees who are not now covered. The growth of outgo could be reduced by changes in the cost-of-living adjustments of benefits, by gradually increasing the normal retirement age, or by gradually decreasing the relative benefit level     

Equalizing tax bases or tax revenues under tax competition? The role of formula apportionment

This paper contributes to the literature on fiscal equalization and corporate tax competition. The innovation is that we explicitly model multinational enterprises and a corporate tax system that is designed according to formula apportionment. Two main results are obtained. First, in contrast to previous studies we identify cases where tax revenue equalization is better in mitigating detrimental tax competition than tax base equalization. Second, tax base equalization nevertheless has the advantage that it may render tax rates efficient, depending on the shape of the apportionment formula. A pure payroll formula does not ensure efficiency, but a back‐of‐the‐envelope calibration of our model to Canadian provinces suggests that a pure sales formula may be optimal.     

The Political Economy of Social Security under Differential Longevity and Voluntary Retirement

This paper studies a model where the existence of a pension system is decided by majority voting. We assume that individuals have the same income but different longevity. Retirement is voluntary and the pension system is characterised by a payroll tax on earnings and a flat pension benefit. Individuals vote only on the tax level. We show that a pension system emerges when there is a majority of long-lived individuals and that voluntary retirement enables to lower the size of the transfers received by the long-lived. A rise in average longevity will also increase the size of the pension system.     

Asymmetric tax multipliers

Using recently published tax series by Romer and Romer (2010) and Cloyne (2013) we examine whether or not positive and negative tax shocks have asymmetric effects on the U.S. and U.K. economies. We find that in the U.S. positive tax shocks—tax increases—do not affect output while negative tax shocks—tax cuts—have large, positive effects. In the U.K., tax increases substantially reduce output while tax cuts have no significant effect.     

The impact of tax reforms on unemployment in a SMOPEC

This paper analyzes revenue-neutral tax reforms for a small open economy which is constrained to a balanced current account and whose producers have market power on the world market. We consider origin-based and destination-based commodity taxes as well as taxes on income, the payroll, and on an imported factor of production. Our main findings are the following. First, the strength, and for some parameter constellations, even the sign of the employment effect of tax reforms varies with the degree of openness of the economy. Second, the indeterminacy of the sign of the employment effect crucially hinges on the presence of an internationally mobile factor. The central mechanism underlying our results are adjustments of the real exchange rate which have repercussions on wage and price setting and therefore on employment.     

减税能否提高企业生产效率?——基于西部大开发准自然实验的研究

降低实体经济企业成本,提高其经济效率,是我国供给侧改革的核心内容,而减税政策是重中之重.文章以西部大开发作为准自然实验,基于1998-2007年工业企业微观数据,使用双重差分法研究了减税对实体经济的影响.研究发现,减税政策能够刺激实体经济发展,名义税率每下降1%,企业生产效率平均提高0.38%-0.75%.减税对企业生产效率的影响既有直接效应也存在间接效应.直接效应表现为减税有利于存续企业生产效率的提升,间接效应则表现为减税可以刺激更多的创业活动,而新进入企业比存续企业具有更高的生产效率.异质性检验表明,小企业比大企业对于减税政策更加敏感,而且减税对生产效率的影响随着时间推移先增加后减小,存在长期收敛效应.文章为我国减税政策如何影响企业生产效率提供了经验证据,对于今后税收政策的制定具有重要的理论与实践意义.     

Index to Volume 52, 2000

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long run and if tax revenues are constant. This reversal of employment effects occurs because the shift in taxes reduces wages. This implies a budget deficit. Hence, taxes will have to be raised if revenues are held constant. If the firm's profits cannot change, the tax increase will cause some firms to close down and unemployment will rise. Thus, the predicted employment consequences of changes in the tax structure depend on assumptions about the time horizon and budget constraint.     

Tax Liability and Tax Evasion in a Competitive Labor Market

In a competitive labor market, a change in the legal incidence of a tax on labor will not alter employment if tax obligations are fulfilled. However, this irrelevance result may no longer apply if taxes can be evaded. In particular, a shift from payroll to income taxes will lower employment. This will be the case if workers exhibit constant absolute risk aversion, have a utility function, which is strongly separable in income and the disutility from working, and the penalty for evasion is not proportional to the amount of taxes evaded. Accordingly, tax evasion opportunities can make the legal incidence of a tax on labor an important determinant of its economic incidence.