Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Earnings responses to payroll and income taxes
Exploiting variation in Dutch pension rates
Nicole Bosch (CPB Netherlands Bureau for Economic Policy Analysis)
Casper van Ewijk (University of Amsterdam, CPB, Netspar)
Maja Micevska Scharf (University of Amsterdam)
February 2016
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
INTRODUCTION
I
Payroll taxes amount to 23% and income taxes to 14% of labour costs in the
OECD and the Netherlands in 2014 (OECD, 2014). On top of this, the Dutch
pension contributions are among the highest worldwide.
I
Welfare effects of taxation are driven by both behavioural effects as well as wage
rate effects (incidence). Empirical literature on payroll taxes is scarce (Saez et al.,
2012).
I
Current paper uses panel approach exploiting exogenous tax variation over time
largely resulting from pension contributions.
I
Goals
I
I
Separately estimate responses to payroll taxes and to income taxes
I
Shed additional light on the issue of incidence of payroll taxes
Empirical analysis closely related to Lehmann, Marical & Rioux (JpuB, 2013).
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Dutch pension system
I
The Dutch pension system consists of three pillars. Old age pensions,
occupational pensions and individual pension savings.
I
Even without statutory obligation, employers voluntarily offer occupational
pensions. Once such an agreement exists at an industry level, it is compulsory.
I
Pension funds are supervised by the Netherlands Bank and are restricted to
regulation (funding ratio, interest rate) but have large discretionary power. Funds
invest abroad (not own sector).
I
There is a clear contribution-benefit linkage, but because of the collective nature,
the system is not actuarially fair. Most are defined benefit schemes, some are
defined contribution.
I
Contributions apply to earnings between a lower limit and - often- an upper limit.
I
Large up-and-down movements in average and marginal rates (see next Figures).
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Marginal pension rates in 2012
ϯϱ
DĂƌŐŝŶĂůƉĞŶƐŝŽŶƌĂƚĞ;йͿ
ϯϬ
Ϯϱ
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&ŽŽĚƉƌŽĚƵĐƚŝŽŶ
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Individual earnings responses to taxes
ϳϬϬϬϬ
ϴϬϬϬϬ
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ZĞƚĂŝů
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Variation in marginal pension rates over time
zĞĂƌͲƚŽͲLJĞĂƌĐŚĂŶŐĞƐŝŶŵĂƌŐŝŶĂůƉĞŶƐŝŽŶƌĂƚĞƐ;йͲƉŽŝŶƚƐͿ
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ϮϬϬϴ
Individual earnings responses to taxes
ϮϬϬϵ
ϮϬϭϬ
ϮϬϭϭ
ϮϬϭϮ
ϮϬϭϯ
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Variation in lower limits over time
zĞĂƌͲƚŽͲLJĞĂƌĐŚĂŶŐĞŝŶůŽǁĞƌůŝŵŝƚ;ĞƵƌŽͿ
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Individual earnings responses to taxes
ϮϬϬϵ
ϮϬϭϬ
ϮϬϭϭ
ϮϬϭϮ
ϮϬϭϯ
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Variation in lower limits over time, including extreme cases
ϭϬϬϬϬ
zĞĂƌͲƚŽͲLJĞĂƌĐŚĂŶŐĞŝŶůŽǁĞƌůŝŵŝƚ;ĞƵƌŽͿ
EͲŵƌŽ ĂŶŬ
ϱϬϬϬ
/E'ĂŶŬ
Ϭ
,ŽŽŐŽǀĞŶƐͬ dĂƚĂ^ƚĞĞů
WŚŝůůŝƉƐ
ͲϱϬϬϬ
ͲϭϬϬϬϬ
ϮϬϬϳ
ϮϬϬϴ
Individual earnings responses to taxes
ϮϬϬϵ
ϮϬϭϬ
ϮϬϭϭ
ϮϬϭϮ
ϮϬϭϯ
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Are changes in pension rates exogenous?
P
∆ log wi,t = α + β P ∆ log τi,t
+ γXi,t−1 + ui,t
where wi,t indicates labour costs for person i in year t and
rate.
τP
(1)
is the net-of-payroll tax
I
Reversed causality: change in wi,t affects change in τ due to nonlinear tax
I
Omitted vars: unobs. (pension fund) chars may impact both changes in τ and w
Solutions
I
Instrument tax rates (Gruber and Saez, 2002; Weber, 2014)
I
Include pensionfund dummies (e.g. demographics), yeardummies (financial crisis)
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Are changes in pension rates exogenous after including pensionfund and timedummies?
I
Source of variation in rates due to legal rules (funding ratios, life expectancy)
that do not affect wages directly
I
Variation in international interest rate impact asset portfolio and may lead to
different rates, but do not have a direct impact on wages.
I
Pensionfunds have large discretionary power in setting pension rates (lower limit,
division between employer and employee, indexation retirees).
Sectoral downturns (construction sector)? Lower wages and higher rates go together?
Impact on rates depends foremost on financial position fund. Funds have large
discretionary power, and can set different rates even in same financial position.
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
What is incidence?
I
Statutory incidence: who pays the tax
I
Economic incidence: who bears the burden (employment and wages)
I
Invariance of Incidence Proposition: statutory incidence irrelevant
I
Labour demand and labour supply elasticities determine incidence
In equilibrium, incidence on employee/ full shifting to employee (Gruber, 1997) if:
I
Elastic demand;
I
Inelastic supply or
I
Full tax-benefit linkage
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Complications/ disequilibrium
I
Institutions (minimum wage, sticky wages, labour unions)
I
Competitiveness market (small open economy, monopoly, prices)
In the end, it is an empirical question whether costs are shifted to employees. Earlier
micro-econometric studies find varying effects:
I
No shifting to employee because of sticky wages and significant labour supply
effects (Lehmann et al., 2013)
I
Incidence of higher employee (employer) contributions paid by employee
(employer). Different costs and net wages for new employees (Saez et al. 2012)
I
Economic incidence equals statutory incidence (Neumann and Mueller, 2014)
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Infer incidence from panel estimates
Let’s start from changes in labour costs w = h ∗ W (Lehmann et al., 2013).
1-atr
∆ log wi,t =
P
I
I
I
α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
(2)
marginal net-of-payroll tax τ P and net-of-income tax τ I (substitution effects)
average net-of-payroll tax ρP and net-of-income tax ρI (income effects/incidence)
(assuming small income effects)
Labour cost
Full incidence EE
Benchmark (el.LD)
ER on ER EE on EE
e.g. Sticky wages
Full incidence ER
βρP = βρI = 0
βτI > βτP ; βτI > 0
P = −1; β P = β I = 0
βρr
ρe
ρ
βτI > βτPe ; βτI > 0
P = β P = β I = −1
βρr
ρe
ρ
βτI = βτP = 0
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Hourly wage costs
wi,t
P
I
I
I
) = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
hi,t
(3)
marginal net-of-payroll tax τ P and net-of-income tax τ I (marginal incidence)
average net-of-payroll tax ρP and net-of-income tax ρI (incidence)
(assuming hours is only behavioural effect)
∆ log(
Full incidence EE
Benchmark (el.LD)
ER on ER,EE on EE
e.g. Sticky wages
Full incidence ER
βρP = βρI = 0
βτI = βτP = 0
P = −1; β P = β I = 0
βρr
ρe
ρ
βτI = βτP = 0
P = β P = β I = −1
βρr
ρe
ρ
βτI = βτP = 0
Labour cost/h
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Empirical model
First, we estimate changes in labour costs w = h ∗ W (Lehmann et al., 2013).
P
I
I
I
∆ log wi,t = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
(4)
The vector Xi,t−1 includes demographics, pensionfund dummies, yeardummies and a
function of base-year income. We assume ∆ log SSCs = 0. The error term ui,t
captures time-varying and unobserved heterogeneity.
I
βρP = 0 and βτP > 0 (incidence on EE, lower posted wages and/or lower hours)
I
βρP = −1 and βτP = 0 (incidence on ER)
Income versus payroll taxes:
I
|βρP | > |βρI | and βτP > βτI > 0 (more salient payroll tax)
I
|βρI | > |βρP | and βτI > βτP > 0 (tax-benefit linkage)
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Hourly labour cost
Second, we estimate the following equation where we control for hours:
wi,t
P
I
I
I
) = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
hi,t
(5)
Assuming hours is only behavioural response (neglect effort, avoidance), we can
interpret coefficient as incidence.
∆ log(
I
βρP = 0, βρI = 0 (full incidence on EE)
I
βρP = −1 (full incidence on ER)
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Separating employee and employer taxes
Our third estimation separates employer rate (ρr
¯ P ) from employee pension rate (ρe
¯ P ).
P
I
P
P
I
I
∆ log wi,t = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρe
∆ log ρe
¯P
¯P
i,t +βρr ∆ log ρr
i,t +βρ ∆ log ρ̄i,t +γXi
(6)
(assuming small income effects)
I
P = 0 (incidence of ER on EE, full shifting)
βρr
I
P = −1 (incidence of ER on ER, e.g. posted wage stickiness)
βρr
I
P = 0, β I = 0 (incidence of EE on EE)
βρe
ρ
I
P = −1, β I = −1 (incidence of EE on ER)
βρe
ρ
I
P | > |β P | (less salient employer payroll tax, Iturbe-Ormaetxe, 2015)
|βρr
ρe
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Analogue to ETI literature, estimating previous equations leads to two problems:
I
Endogenous (marginal) tax rate –> instrument with synthetic tax rate based on
(lags of) base-year income (Gruber and Saez, 2002; Weber, 2014)
I
Mean reversion and diverging income trends –> add functions of base-year income
I
Include income controls can mob up changes in tax rates. Especially if income
controls are close to large changes in tax rates (thresholds).
I
We include synthetic changes in average tax rate and not actual change in
average tax rates, because they do not depend on labour cost and pension system
is not proportional.
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Data
I
Dutch Social Statistical Database on Jobs 2006-2012 is a longitudinal dataset for
entire working population.
I
Containing (uncapped) monthly wage earnings, hours, CLA code, firm code, and
employer and employee SSCs.
I
Earnings and SSCs are reported by employers to tax administration and are reliable.
I
Combined with municipality data and a self-constructed database with pension
rates for each collective labour agreement (CLA)
I
Income rates are simulated by using CPB’s detailed gross-net calculator
I
Sample selection: age 20-55, balanced panel, same household type, same CLA
I
This leaves us with 3 mln person-year observations (approx. 700K each year).
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Estimation results: Labour cost
P
I
I
I
∆ log wi,t = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
βτP
βτI
βρP
βρI
Income control
(1)
0.0281
(0.0002)
0.0035
(0.0007)
-0.1770
(0.0023)
-0.0299
(0.0057)
(2)
0.0227
(0.0018)
-0.0019
(0.0007)
-0.1130
(0.0023)
-0.0230
(0.0056)
(3)
0.0193
(0.0018)
-0.0021
(0.0007)
-0.0900
(0.0023)
-0.0149
(0.0056)
none
10-piece
log income
(EE)
>=0
(ER)
0
>=0
0
0
-1
0
-1
Notes: controls for gender, age and marital status, year and pensionfund dummies, labour costs
> 10K. Two-year changes. N=2.93 mln
First-stage regressions: strong instruments
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Estimation results: hourly labour costs
∆ log(
wi,t
P
I
I
I
) = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρP ∆ log ρ̄P
i,t +βρ ∆ log ρ̄i,t +γXi,t−1 +ui,t
hi,t
βτP
βτI
βρP
βρI
Income control
(1)
0.1410
(0.0020)
0.0017
(0.0008)
-0.2400
(0.0025)
0.0414
(0.0114)
(2)
0.1280
(0.0016)
-0.0033
(0.0006)
-0.1780
(0.0020)
0.0488
(0.0048)
(3)
0.1250
(0.0016)
-0.0038
(0.0006)
-0.1680
(0.0020)
0.0632
(0.0049)
none
10-piece
log income
(EE)
>=0
(ER)
0
>=0
0
0
-1
0
-1
Notes: controls for gender, age and marital status, year and pensionfund dummies, labour costs
> 10K. Two-year changes. N=2.93 mln
First-stage regressions: strong instruments
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Estimation results Labour costs: separating employer and employee
LC
Penmr
Penpmr
Taxmr
Taxpmr
PenEpar
PenRpar
Taxpar
LC
1
0.055
0.026
-0.145
0.012
-0.200
-0.052
-0.033
Individual earnings responses to taxes
Penmr
Penpmr
Taxmr
Taxpmr
PenEpar
PenRpar
Taxp
1
0.788
-0.009
0.014
0.029
0.137
-0.061
1
-0.004
0.015
0.043
0.166
-0.064
1
0.437
0.005
0.01
-0.052
1
0.001
-0.003
-0.043
1
0.758
0.022
1
0.048
1
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Estimation results Labour costs: separating employer and employee
P
I
P
P
I
I
∆ log wi,t = α+βτP ∆ log τi,t
+βτI ∆ log τi,t
+βρe
∆ log ρe
¯P
¯P
i,t +βρr ∆ log ρr
i,t +βρ ∆ log ρ̄i,t +..+u
βτP
βτI
P
βρe
P
βρr
βρI
(1)
0.0226
(0.0018)
0.0034
(0.0007)
0.1760
(0.0046)
-0.3730
(0.0063)
-0.0328
(0.0057)
(2)
0.0177
(0.0018)
-0.0020
(0.0007)
0.1010
(0.0046)
-0.2130
(0.0063)
-0.0246
(0.0056)
(3)
0.0137
(0.0018)
-0.0022
(0.0007)
0.0622
(0.0046)
-0.1390
(0.0063)
-0.0165
(0.0056)
none
10-piece
log income
Income control
(EE)
>=0
(ER)
0
(EE,ER)
>=0
>=0
0
>=0
0
-1
0
0
-1
-1
0
-1
0
Notes: controls for gender, age and marital status, year and pensionfund dummies, labour costs > 10K. Two-year
changes. N=2.93 mln
First-stage regressions: strong instruments
Correlation ρe
¯P
¯P
i,t , ρr
i,t = 0.75
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Sensitivity: labour costs
βτP
βτI
βρP
βρI
(1)
-0.0590
(0.0014)
-0.0002
(0.0058)
-0.0420
(0.0018)
0.0253
(0.0043)
(2)
0.0144
(0.0018)
-0.0021
(0.0009)
-0.1190
(0.0023)
-0.1040
(0.0070)
(3)
0.2160
(0.0027)
-0.0018
(0.0037)
0.0399
(0.0026)
-0.0446
(0.0056)
(4)
0.159
-0.0020
-0.527
-0.0148
Notes: (1) splines and difference log(wi,t−1 ) − log(wi,t−2 ) , (2)
excluding public sector, (3) fully interacted pensionfund and timedummies, (4) actual changes in tax rates (instrumented)
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Findings
I
Small and significant coefficients for marginal tax rates. Zero effect income tax.
I
Small and negative coefficients for (net-of) average income tax.
I
Small but sizeable negative coefficients for (net-of) average payroll tax (range of
-0.1 to -0.2).
I
Somewhat sensitive to inclusion of income controls.
I
Employer pension contributions raise labour costs (10% increase leads to 2%
higher costs)
I
Employee contributions lower labour cost. Contradicting result, implying negative
income effects or more than offsetting incidence.
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Preliminary conclusions
I
Pension schedule provides ample opportunity to analyse incidence.
I
Small variation in income tax rates limits comparison income and payroll tax.
I
Rich and reliable administrative data. Quality hours needs further exploration.
I
We find less negative effects of payroll taxes than earlier studies.
I
This suggests that Dutch wages are flexible or that employees fully value benefits.
I
We conclude that incidence is on the employee, although not fully.
I
Tentative results show that employers are less able to shift their contributions to
employees which could be explained by the fact that these are less salient.
Overall, more to be done.
Individual earnings responses to taxes
Nicole Bosch
Introduction
Pension
Incidence
Empirical model
Data
Results
Conclusions
Future plans
I
Estimate hours equation and explore reliability hours
I
Technical issues like rescaling and multiplicative structure
I
Focus on separate pensionfunds
I
Alternative instruments: grouping variable (pensionfund*year)
I
Sample selection (more heterogeneous sample)
I
Focus on subgroup with income tax reform
Individual earnings responses to taxes
Nicole Bosch