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Incidence effects of proposed reforms for the payroll tax in Finnish manufacturing

Author

Listed:
  • Pasi Holm

    (University ofHelsinki)

  • Seppo Honkapohja

    (University ofHelsinki)

  • Erkki Koskela

    (University ofHelsinki)

Abstract

The main proposals for the reform of payroll-based employers' social security contributions have been the (partial) replacement of the contribution by increased sales tax and the so called SII-contribution, in which the base would consist of the wage bill and the operating margin of the firm. In this study models for the determination of wages, employment and investment in Finnish industry are estimated. These models are then used to simulate the effects of the proposed reforms on the same variables. The effects of both reform proposals are qualitatively similar. Both reforms would raise nominal wages and employment. They would also reduce capital formation. Real wages would probably remain roughly constant in the case of the SII-contribution, while they would fall in the shift to sales taxation. In percentage terms, the effects on the real variables would be small, less than one percentage point in magnitude. The effects on real wages depend on the degree of shifting of the increased sales tax or SII-contribution to output prices. Both reform proposals aim at moving away from a method of finance that is based entirely on a payroll tax towards a general tax on factors of production.

Suggested Citation

  • Pasi Holm & Seppo Honkapohja & Erkki Koskela, 1993. "Incidence effects of proposed reforms for the payroll tax in Finnish manufacturing," Finnish Economic Papers, Finnish Economic Association, vol. 6(2), pages 67-78, Autumn.
    • Handle: RePEc:fep:journl:v:6:y:1993:i:2:p:67-78
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    References listed on IDEAS

    as
    1. Vartia, Tor Eriksson & Antti Suvanto, & Pentti,, 1989. "Wage Setting in Finland," Discussion Papers 286, The Research Institute of the Finnish Economy.
    2. Holmlund, Bertil, 1983. " Payroll Taxes and Wage Inflation: The Swedish Experience," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(1), pages 1-15.
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    Cited by:

    1. Jaakko Pehkonen, 1999. "Wage formation in Finland, 1960-1994," Finnish Economic Papers, Finnish Economic Association, vol. 12(2), pages 82-91, Autumn.
    2. Brunila, Anne, 1994. "Investment and financing considerations: Evidence from Finnish panel data," Bank of Finland Research Discussion Papers 4/1994, Bank of Finland.
    3. repec:zbw:bofrdp:1994_004 is not listed on IDEAS
    4. Brunila, Anne, 1994. "Investment and financing considerations : Evidence from Finnish panel data," Research Discussion Papers 4/1994, Bank of Finland.

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    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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