Despite the growing reliance on payroll taxation worldwide, there is limited evidence on the incidence of payroll taxes. I provide new evidence by examining the experience of Chile before and after the privatization of its Social Security system. This policy change led to a sharp exogenous reduction in the payroll tax burden on Chilean firms; the average payroll tax rate in my sample fell from 30% to 5% over this six year period. I use data from a census of manufacturing firms, which contains information on firm specific tax payments and average wages. I find strong evidence that the incidence of payroll taxation was fully on wages, with no effect on employment. A potential weakness with this approach is that some of the variation in firm-specific tax rates may be spurious, for example due to measurement error in wages. I attempt to surmount this problem by using a variety of different estimators, all of which yield consistent evidence of full shifting.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5053.
Length: Date of creation: Mar 1995 Date of revision: Publication status: published as Gruber, Jonathan. "The Incidence Of Payroll Taxation: Evidence From Chile," Journal of Labor Economics, 1997, v15(3,Jul), Part 2, S72-S101. Handle: RePEc:nbr:nberwo:5053
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Find related papers by JEL classification: H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
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