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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.

Suggested Citation

  • Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5053
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    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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