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Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece

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Author Info

  • Saez, Emmanuel

    () (University of California, Berkeley)

  • Matsaganis, Manos

    () (Athens University of Economics and Business)

  • Tsakloglou, Panos

    () (Athens University of Economics and Business)

Abstract

This paper analyzes the response of earnings to payroll tax rates using a cohort-based reform in Greece. All individuals who started working on or after 1993 face permanently a much higher earnings cap for payroll taxes, creating a large and permanent discontinuity in marginal payroll tax rates by date of entry in the labor force for upper earnings workers. Using full population administrative Social Security data and a Regression Discontinuity Design, we estimate the long-term incidence and effects of marginal payroll tax rates on earnings. Standard theory predicts that, in the long run, new regime workers should bear the entire burden of the payroll tax increase (relative to old regime workers). In contrast, we find that employers compensate new regime workers for the extra employer payroll taxes but not for the extra employee payroll taxes. We do not find any evidence of labor supply responses around the discontinuity, suggesting low efficiency costs of payroll taxes. The non-standard incidence results are the same across firms of different sizes. Tax incidence, however, is standard for older workers in the new regime as they bear both the employee and employer tax. Those results, combined with a direct small survey of employers, can be explained by social norms regarding pay seniority which create a growing wedge between pay and productivity as workers age.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4752.

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Length: 56 pages
Date of creation: Feb 2010
Date of revision:
Publication status: published in: Quarterly Journal of Economics, 2012, 127 (1), 493-533
Handle: RePEc:iza:izadps:dp4752

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Keywords: payroll taxes; Greece;

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References

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Cited by:
  1. Etienne Lehmann & François Marical & Laurence Rioux, 2012. "Labor Income Responds Differently to Income-Tax and Payroll-Tax Reforms," Working Papers 2012-24, Centre de Recherche en Economie et Statistique.
  2. Henrik Kleven & Camille Landais & Emmanuel Saez, 2010. "Taxation and International Migration of Superstars: Evidence from the European Football Market," NBER Working Papers 16545, National Bureau of Economic Research, Inc.
  3. Lehmann, Etienne & Marical, François & Rioux, Laurence, 2011. "Labor Earnings Respond Differently to Income-Tax and to Payroll-Tax Reforms," IZA Discussion Papers 6108, Institute for the Study of Labor (IZA).
  4. Pia Rattenhuber, 2012. "Marginal Taxes: A Good or a Bad for Wages?: The Incidence of the Structure of Income and Labor Taxes on Wages," Discussion Papers of DIW Berlin 1193, DIW Berlin, German Institute for Economic Research.

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