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The Incidence of Payroll Taxation: Evidence from Chile

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  • Jonathan Gruber

Abstract

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5053.

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Date of creation: Mar 1995
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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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  1. John Bound & David A. Jaeger & Regina Baker, 1993. "The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Technical Working Papers 0137, National Bureau of Economic Research, Inc.
  2. Joshua Angrist, 1988. "Grouped Data Estimation and Testing in Simple Labor Supply Models," Working Papers 614, Princeton University, Department of Economics, Industrial Relations Section..
  3. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Working Papers 680, Princeton University, Department of Economics, Industrial Relations Section..
  4. Summers, Lawrence H & Gruber, Jonathan & Vergara, Rodrigo, 1993. "Taxation and the Structure of Labor Markets: The Case of Corporatism," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 385-411, May.
  5. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  6. Alan Krueger & Jorn-Steffen Pischke, 1989. "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," Working Papers 635, Princeton University, Department of Economics, Industrial Relations Section..
  7. Peter Diamond, 1993. "Privatization of Social Security: Lessons from Chile," NBER Working Papers 4510, National Bureau of Economic Research, Inc.
  8. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  9. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
  10. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-93, September.
  11. David Card, 1991. "Do Minimum Wages Reduce Employment? A Case Study of California, 1987-89," NBER Working Papers 3710, National Bureau of Economic Research, Inc.
  12. repec:fth:prinin:315 is not listed on IDEAS
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  1. Why would we assume that high earners are price takers in the labour market?
    by Stephen Gordon in Worthwhile Canadian Initiative on 2010-10-11 12:50:13
  2. Some economics of payroll taxes
    by Pedro S. Martins in The Portuguese Economy on 2011-05-16 14:54:00
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