IDEAS home Printed from https://ideas.repec.org/a/oup/qjecon/v127y2012i1p493-533.html
   My bibliography  Save this article

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

Author

Listed:
  • Emmanuel Saez
  • Manos Matsaganis
  • Panos Tsakloglou

Abstract

This article analyzes the response of earnings to payroll tax rates using a cohort-based reform in Greece. 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 labor supply effects and incidence of 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 along the extensive or intensive margins around the discontinuity, suggesting low efficiency costs of payroll taxes. We discuss various possible explanations for those results. Copyright 2012, Oxford University Press.

Suggested Citation

  • Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 493-533.
  • Handle: RePEc:oup:qjecon:v:127:y:2012:i:1:p:493-533
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/qje/qjr052
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kevin Lang, 2003. "The Effect of the Payroll Tax on Earnings: A Test of Competing Models of Wage Determination," NBER Working Papers 9537, National Bureau of Economic Research, Inc.
    2. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    3. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    4. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
    5. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695, Elsevier.
    6. Pekka Ilmakunnas & Mika Maliranta & Jari Vainiomäki, 2004. "The Roles of Employer and Employee Characteristics for Plant Productivity," Journal of Productivity Analysis, Springer, vol. 21(3), pages 249-276, May.
    7. Vegard Skirbekk, 2004. "Age and Individual Productivity: A Literature Survey," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 2(1), pages 133-154.
    8. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
    9. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
    10. Anderson, Patricia M. & Meyer, Bruce D., 1997. "The effects of firm specific taxes and government mandates with an application to the U.S. unemployment insurance program," Journal of Public Economics, Elsevier, vol. 65(2), pages 119-145, August.
    11. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    12. Kubik, Jeffrey D., 2004. "The incidence of personal income taxation: evidence from the tax reform act of 1986," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1567-1588, July.
    13. Manos Matsaganis, 2007. "Union Structures and Pension Outcomes in Greece," British Journal of Industrial Relations, London School of Economics, vol. 45(3), pages 537-555, September.
    14. Holmlund, Bertil, 1983. " Payroll Taxes and Wage Inflation: The Swedish Experience," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(1), pages 1-15.
    15. James L. Medoff & Katharine G. Abraham, 1980. "Experience, Performance, and Earnings," The Quarterly Journal of Economics, Oxford University Press, vol. 95(4), pages 703-736.
    16. Mulligan Casey B & Gil Ricard & Sala-i-Martin Xavier X, 2010. "Social Security and Democracy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, March.
    17. Leigh Andrew, 2010. "Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-43, May.
    18. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
    19. Hellerstein, Judith K & Neumark, David & Troske, Kenneth R, 1999. "Wages, Productivity, and Worker Characteristics: Evidence from Plant-Level Production Functions and Wage Equations," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 409-446, July.
    20. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    21. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, vol. 83(2), pages 173-194, February.
    22. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    23. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
    24. Torbjorn Hacgeland & Tor Jakob Klette, 1999. "Do Higher Wages Reflect Higher Productivity? Education, Gender and Experience Premiums in a Matched Plant-Worker Data Set," Contributions to Economic Analysis, in: The Creation and Analysis of Employer-Employee Matched Data, pages 231-259, Emerald Group Publishing Limited.
    25. Joanne Salop & Steven Salop, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 619-627.
    26. Frank, Robert H. & Hutchens, Robert M., 1993. "Wages, seniority, and the demand for rising consumption profiles," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 251-276, August.
    27. Bruno Crépon & Nicolas Deniau & Sébastien Pérez-Duarte, 2003. "Wages, Productivity and Worker Characteristics : A French Perspective," Working Papers 2003-04, Center for Research in Economics and Statistics.
    28. Joanne Salop & Steven C. Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers 80, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam, Stuart & Phillips, David & Roantree, Barra, 2019. "35 years of reforms: A panel analysis of the incidence of, and employee and employer responses to, social security contributions in the UK," Journal of Public Economics, Elsevier, vol. 171(C), pages 29-50.
    2. Benoit Dostie, 2011. "Wages, Productivity and Aging," De Economist, Springer, vol. 159(2), pages 139-158, June.
    3. Smith, John, 2009. "Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 684-690, August.
    4. Börsch-Supan, Axel & Weiss, Matthias, 2016. "Productivity and age: Evidence from work teams at the assembly line," The Journal of the Economics of Ageing, Elsevier, vol. 7(C), pages 30-42.
    5. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Maia Güell, 2010. "Is seniority-based pay used as a motivational device? Evidence from plant-level data," Research in Labor Economics, in: Jobs, Training, and Worker Well-being, pages 155-187, Emerald Group Publishing Limited.
    6. Dohmen, Thomas J., 2004. "Performance, seniority, and wages: formal salary systems and individual earnings profiles," Labour Economics, Elsevier, vol. 11(6), pages 741-763, December.
    7. Vegard Skirbekk, 2004. "Age and Individual Productivity: A Literature Survey," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 2(1), pages 133-154.
    8. Paul Hek & Daniel Vuuren, 2011. "Are older workers overpaid? A literature review," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 436-460, August.
    9. Battisti, Michele, 2015. "Present-biased preferences and optimal compensation schedules: a note," MPRA Paper 64818, University Library of Munich, Germany.
    10. John G. Sessions & Nikolaos Theodoropoulos, 2014. "Tenure, Wage Profiles and Monitoring," Research in Labor Economics, in: New Analyses of Worker Well-Being, volume 38, pages 105-162, Emerald Group Publishing Limited.
    11. Ourania Karakosta & Nikos Tsakiris, 2009. "Indirect Tax Reforms and Public Goods under Imperfect Competition," University of Cyprus Working Papers in Economics 5-2009, University of Cyprus Department of Economics.
    12. Daniel Vuuren, 2014. "Flexible Retirement," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 573-593, July.
    13. Jesse Rothstein, 2009. "Is the EITC Equivalent to an NIT? Conditional Cash Transfers and Tax Incidence," NBER Working Papers 14966, National Bureau of Economic Research, Inc.
    14. Matthias Collischon & Kamila Cygan-Rehm & Regina T. Riphahn, 2021. "Employment effects of payroll tax subsidies," Small Business Economics, Springer, vol. 57(3), pages 1201-1219, October.
    15. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    16. Bennmarker, Helge & Mellander, Erik & Öckert, Björn, 2009. "Do regional payroll tax reductions boost employment?," Labour Economics, Elsevier, vol. 16(5), pages 480-489, October.
    17. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    18. Grund, Christian & Sliwka, Dirk, 2003. ""The Further We Stretch the Higher the Sky" - On the Impact of Wage Increases on Job Satisfaction," Bonn Econ Discussion Papers 1/2003, University of Bonn, Bonn Graduate School of Economics (BGSE).
    19. Clark, Andrew E., 1999. "Are wages habit-forming? evidence from micro data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 179-200, June.
    20. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    21. Katharina Frosch, 2009. "Do only new brooms sweep clean? A review on workforce age and innovation," MPIDR Working Papers WP-2009-005, Max Planck Institute for Demographic Research, Rostock, Germany.
    22. John Haltiwanger & Michael Waldman, 1983. "Why Bad Wokers Receive Raises," UCLA Economics Working Papers 301, UCLA Department of Economics.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:qjecon:v:127:y:2012:i:1:p:493-533. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/qje .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.