David Phillips, Leon Bettendorf, Antoine Bozio, Tomas Breda, Johannes Geibel,
Michael Neumann and Marianne Tenard
Workshop on SSCs, Institute for Fiscal Studies, London, February 2016
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• Rather than utilise reforms or structural features in a single country,
“macro” literature uses cross-country data, variation and policy reform
• Seminal study undertaken by OECD (1990)
– Additional studies since
• Widespread perception that the macro evidence supports view that workers bear the burden of SSCs
– Contrast with more varied evidence of the micro-literature
Saez (2012): “The most compelling macro-economic argument suggesting that the incidence is borne primary by workers is the fact that the labor income share (which includes all payroll taxes) in GDP is fairly stable over time and across countries, OECD (1990)”
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100
90
80
70
60
50
40
30
20
10
0
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-4 -2
0
-1
0
-2
-3
5
4
3
2
1
2 4 6 8 10
Change in Labour Share
12
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-4 -2
0
-1
0
-2
-3
5
4
3
2
1
2 4 6 8 10
Change in Labour Share
12
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• Reviews this literature
– Underlying conceptual models and empirical strategies
– Data on which they are estimated
– Results
– Issues that need addressing
• Preview of findings
– Not clear that employees bear all burden – wide range of results
– Labour market institutions seem to matter for incidence
– Legal incidence matters in short-run
– Unclear about longer term, as no studies really look properly at this
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Three approaches used
1.
Change in wages, regressed on changes in taxes and productivity:
– Simple 12-year difference using 16 OECD countries, 1974 and 1986
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• Underlying theoretical model is homogenous firms and workers in perfectly competitive markets
• F.O.C for profit maximisation: z = employer cost of labour
• Link between employer cost and gross wage:
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• Estimate the following equation:
• τ
E
is employee SSC tax rate, τ
C
is consumption tax rate, y/e is average labour productivity
– All tax rates measured as % of GDP
• Results
• Can reject β
1
= 0 (Full incidence on employer), but not -1 (full on worker)
• Cannot reject incidence of all taxes fully on worker
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• Misspecifications
– Approximation that ln(1+
τ
X
) =
τ
X
only holds when
τ
X
is small. Leads to classical measurement error of all coefficients.
– Use of average not marginal labour productivity
• Data problems:
– Sensitivity of results to precise years and sample of countries
– OECD data has spurious variation in SSC rates due to data compilation problems
• Interpretation as ‘long run’
– 12-year differences does not necessarily mean pick up long-run effects – weighted average of different durations
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Three approaches used
1.
Change in wages, regressed on changes in taxes and productivity:
– Simple 12-year difference using 16 OECD countries, 1974 and 1986
2.
Real-product-wage, regressed on lag, tax wedge, and capital/labour ratio
– Average of 16 country-level regressions, 1955 – 1986
– Tests for incidence of employer==employer
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• Regress:
Where RPW = real product wage, TT = total tax wedge, X = 70s dummy
• Results:
(8.4) (1.7) (0.5) (2.1)
• With 16 individual regressions, t=0.5 is ‘borderline significance’
– Some partial bearing of tax by employers?
• Cannot reject incidence of employee and employer same, but large standard errors mean:
– Cannot reject employers SSCs borne by workers and vice versa!
© Institute for Fiscal Studies

Three approaches used
1.
Change in wages, regressed on changes in taxes and productivity:
– Simple 12-year difference using 16 OECD countries, 1974 and 1986
2.
Real-product-wage, regressed on lag, tax wedge, and capital/labour ratio
– Average of 16 country-level regressions, 1955 – 1986
– Tests for incidence of employer==employer
3.
As above but also including change in tax wedge
– Much stronger statistical power
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• Finds β
4
= 0.5, statistically different from 0 and 1
– Around half burden of taxes in short-run borne by employers
• Also finds
– Employers bear less of employee than employer SSCs in short-run
– But still some evidence of partial shifting of both in short-run
– Employers bear more of indirect tax burden than SSC burden – the role of inflation in pay negotiations?
• So evidence on long-run incidence is weak
– Stronger evidence about short-run
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• Generally, better specified than OECD (1990)
– For instance, use ln(1+ τ ) not τ
• But most cited (Alesina and Perotti (1997) and Daveri and Tabellini
(2000)) use problematic OECD data
• Wide range of estimates
– Some find labour taxes fully on worker even in short-term
– Others find substantial share on employers even in long-term
• So taken together, what can we learn?
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• Number of studies look at ‘dynamic’/long-run effects
– Tyrvainen (1995) has vector auto-regressive model
– Arpaia and Carone (2004), Azemar and Desbordes (2010) and Nunziata
(2005) have auto-regressive wages
• Auto-regressive models not suited to finding long run-effects of SSCs
– Simply multiply short run effects: if partly incident on employers in short term, point estimate is even more so in long term
– Weak statistical power: not able to distinguish between statutory incidence and shifting
• Difficult to conclude how short and long-run incidence differ from these studies
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• Only one study tests whether incidence of employer and employee incidence differs (Arpaia and Carone (2004))
– Short-run: employee SSCs on workers, employers SSCs partly on employers
– Weak statistical power means cannot test long-run
• More studies examine SSC-benefit link, and compare with income tax
– Ooghe et al (2003) find more SSCs borne by workers if stronger contribution-benefit link
– Alesina and Perotti (1997) find similar in countries with highly centralised bargaining
– But find employer SSCs borne more by employers than income tax when low or moderately centralised bargaining
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• Alesina and Perotti (1997) find high/low centralised wage bargaining mean SSCs borne almost entirely by workers
– But medium-level of bargaining around two/thirds by employers
• Consistent with models of bargaining (e.g. Olson (1982))
– Power of unions at industry level allows shifting of burden to employers
– But take account of employment spillovers if national-level bargaining
• Other papers find moderate degrees of coordination associated with burden partly on employers
– Most find highly-centralised means incidence on workers (3 papers)
– Less consensus on whether decentralised means same (2 papers)
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• Idea that this literature supports full shifting to workers is misplaced
• No clear conclusion on either short- or long-run incidence
– Studies do not properly address issue of long-run incidence
• Little work examines whether legal incidence matters for economic incidence
• Only clear finding is that bargaining institutions matter
– But no real consensus on what way
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• Update using longer-time series and better data
– A comprehensive comparison of methods?
• Properly examine longer-run effects using lagged changes in tax rates
• More examination of influence of formal incidence
• Cross-country studies using micro data, and/or different degrees of aggregation of data
– May be able to learn about ‘local’ versus ‘market’ level incidence
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