Estimating economic incidence and labour supply
elasticities of SSC based cross-country micro data
Stuart Adam, Nicole Bosch, Antoine Bozio, David Phillips,
Michael Neumann
March 1, 2016
Motivation
Outline
Motivation
Methodology
Outlook
Methodology
Outlook
Motivation
Methodology
Motivation
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Challenges for country-specific micro studies
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Natural experiments: rare, availability of control groups,
external validity, short-term (legal=economic incidence)
Panel studies: mainly exploit variation over earnings
distribution and/or time, exogenous variation?
Individual vs. market-level outcomes
I
Differences between micro and macro estimates
Outlook
Motivation
Methodology
This study
Estimate economic incidence of and behavioural responses to SSC
based on administrative cross-country micro data
I Identification
I
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Use other countries as control groups (same location in the
earnings distribution)
Exploit potentially larger variation across countries without
averaging on country-level
Aggregate on different levels to examine differences in
individual- and market-level outcomes
Outlook
Motivation
Methodology
Literature
Jaentti, Pirttilae and Selin (2015)
I
Estimation of labour supply elasticities (w.r.t. income taxes)
based on cross-country micro-data
I
Micro, Macro, Micromacro
I
Data: Repeated cross-sections, Luxembourg Income Study
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Tax measures from OECD tax database
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No evidence for systematic differences
Outlook
Motivation
Methodology
Our approach
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Focus on SSC
Long panel of admin data (1975-2010)
I
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Accurate earnings data but (for most countries) no hours of
work
Focus on our 4 countries (FRA, GER, NED, UK)
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Thorough calculation of marginal and average SSC rates
by micro-simulation
Challenge: Comparable data/measures across time and
countries
Outlook
Motivation
Methodology
Outlook
Aggregation
Aggregate data to cells defined by quantiles of the earnings
distribution
I
Data security prevents merging individual admin data across
countries
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From almost individual to country-level: More spillovers
but less precision
I
Variation: Same quantiles of earnings distribution in different
countries
Motivation
Methodology
Outlook
Specification
Empirical specification mainly follows Lehmann, Marical and Rioux
(2013)
essc
essc
∆j ln(zqct ) = α + βτessc ∆j ln(1 − τqct
) + βtessc ∆j ln(1 − tqct
)+
rssc
rssc
+ βτrssc ∆j ln(1 − τqct
) + βtrssc ∆j ln(1 − tqct
)+
inc
inc
+ βτinc ∆j ln(1 − τqct
) + βtinc ∆j ln(1 − tqct
) + qct
q: quantile, c: country, t: year
essc: employee SSC, rssc: employer SSC, inc: income tax
∆j : change between t and t − j for j = (1; 3)
τ : empirical marginal SSC rate: substitution effect
t: empirical average SSC rate: incidence and income effect
Motivation
Methodology
Instruments
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τ , t are functions of z: Need to be instrumented
Gruber and Saez (2002)
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Kopczuk (2005): two separate controls for mean reversion
and differential income trends
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SSC rate in t based on earnings in t − j
f (zt−j ) controls for differential income trends and mean
reversion
SSC rate in t based on zt−j
Controls: f (zt−j−1 ) and f (zt−j − zt−j−1 )
Weber (2014): instruments don’t satisfy exogeneity
requirement
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SSC rate in t based on zt−j−k (we use k ∈ {1, 2})
Control for f (zt−j )
Outlook
Motivation
Methodology
Instruments and cells
Additional endogeneity issue: Cells are defined by outcome
variable
Two approaches
1. Make use of individual panel
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First calculate individual changes in labour costs and
(predicted) tax rates
Then average within cells based on zt−j
Mean reversion: Same as for instrument
Outlook
Motivation
Methodology
Outlook
Instruments and cells II
2. Pseudo-panel
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First average labour costs and (predicted) tax rates within cells
based on zt
Then calculate changes
Mean reversion averaged out
Selection into cells due to tax changes
Motivation
Methodology
Outlook
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Output and merge data
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Estimation
Outlook
Motivation
Methodology
Outlook
References
Gruber, Jon and Emmanuel Saez, “The elasticity of taxable
income: evidence and implications,” Journal of Public
Economics, April 2002, 84 (1), 1–32.
Jaentti, Markus, Jukka Pirttilae, and Hakan Selin, “Estimating
labour supply elasticities based on cross-country micro data: A
bridge between micro and macro estimates?,” Journal of
Public Economics, 2015, 127, 87 – 99. The Nordic Model.
Kopczuk, Wojciech, “Tax bases, tax rates and the elasticity of
reported income,” Journal of Public Economics, 2005, 89
(1112), 2093 – 2119.
Lehmann, Etienne, Franois Marical, and Laurence Rioux,
“Labor income responds differently to income-tax and
payroll-tax reforms,” Journal of Public Economics, 2013, 99
(C), 66–84.
Motivation
Methodology
Outlook
Weber, Caroline E., “Toward obtaining a consistent estimate of
the elasticity of taxable income using difference-in-differences,”
Journal of Public Economics, 2014, 117, 90 – 103.