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 ◮ 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. ◮ 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). ◮ Current paper uses panel approach exploiting exogenous tax variation over time largely resulting from pension contributions. ◮ Goals ◮ Separately estimate responses to payroll taxes and to income taxes ◮ 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 ◮ The Dutch pension system consists of three pillars. Old age pensions, occupational pensions and individual pension savings. ◮ Even without statutory obligation, employers voluntarily offer occupational pensions . Once such an agreement exists at an industry level, it is compulsory. ◮ 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). ◮ 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. ◮ Contributions apply to earnings between a lower limit and - often- an upper limit. ◮ 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 �� �� ������������������������� �� �� �� �� � � � ����� ����� ����� ����� ����� ����� ����� ����� ����� ������ �������������� ������������� ������������� �������������� ������ ������������ ��������������� ������������� Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Variation in marginal pension rates over time �� ��������������������������������������������������������� �� �� � � �� ��� ��� ���� ���� ���� ���� ���� ���� ���� Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Variation in lower limits over time ��� ����������������������������������������� ��� ���� ���� ����� ���� ���� ���� ���� ���� ���� ���� Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Variation in lower limits over time, including extreme cases ����� �������� ���� ����������������������������������������� ���� �������� � ���������� ���������� �������� ����� ������ ���� ���� ���� ���� ���� ���� ���� Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Are changes in pension rates exogenous? ∆ log w i,t = α + β P ∆ log τ P i,t + γX i,t − 1 + u i,t (1) where w i,t indicates labour costs for person i in year t and τ P is the net-of-payroll tax rate. ◮ Reversed causality: change in w i,t affects change in τ due to nonlinear tax ◮ Omitted vars: unobs. (pension fund) chars may impact both changes in τ and w Solutions ◮ Instrument tax rates (Gruber and Saez, 2002; Weber, 2014) ◮ 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? ◮ Source of variation in rates due to legal rules (funding ratios, life expectancy) that do not affect wages directly ◮ Variation in international interest rate impact asset portfolio and may lead to different rates, but do not have a direct impact on wages. ◮ 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? ◮ Statutory incidence: who pays the tax ◮ Economic incidence: who bears the burden (employment and wages) ◮ Invariance of Incidence Proposition: statutory incidence irrelevant ◮ Labour demand and labour supply elasticities determine incidence In equilibrium, incidence on employee/ full shifting to employee (Gruber, 1997) if: ◮ Elastic demand; ◮ Inelastic supply or ◮ Full tax-benefit linkage Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Complications/ disequilibrium ◮ Institutions (minimum wage, sticky wages, labour unions) ◮ 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: ◮ No shifting to employee because of sticky wages and significant labour supply effects (Lehmann et al., 2013) ◮ Incidence of higher employee (employer) contributions paid by employee (employer). Different costs and net wages for new employees (Saez et al. 2012) ◮ 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 w i,t = α + β P τ ∆ log τ P i,t + β I τ ∆ log τ I i,t + β P ρ P i,t + β I ρ I ρ ∆ log ¯ ρ ∆ log ¯ i,t + γX i,t − 1 + u i,t (2) marginal net-of-payroll tax τ P and net-of-income tax τ I (substitution effects) average net-of-payroll tax ρ P and net-of-income tax ρ I (income effects/incidence) (assuming small income effects) Full incidence EE ER on ER EE on EE Full incidence ER Benchmark (el.LD) e.g. Sticky wages β P ρ = β I β P ρr = − 1; β P ρe = β I β P ρr = β P ρe = β I Labour cost ρ = 0 ρ = 0 ρ = − 1 β I τ > β P τ ; β I β I τ > β P τe ; β I β I τ = β P τ > 0 τ > 0 τ = 0 Individual earnings responses to taxes Nicole Bosch
Introduction Pension Incidence Empirical model Data Results Conclusions Hourly wage costs ∆ log( w i,t ) = α + β P τ ∆ log τ P i,t + β I τ ∆ log τ I i,t + β P ρ P i,t + β I ρ I ρ ∆ log ¯ ρ ∆ log ¯ i,t + γX i,t − 1 + u i,t h i,t (3) marginal net-of-payroll tax τ P and net-of-income tax τ I (marginal incidence) average net-of-payroll tax ρ P and net-of-income tax ρ I (incidence) (assuming hours is only behavioural effect) Full incidence EE ER on ER,EE on EE Full incidence ER Benchmark (el.LD) e.g. Sticky wages β P ρ = β I β P ρr = − 1; β P ρe = β I β P ρr = β P ρe = β I Labour cost/h ρ = 0 ρ = 0 ρ = − 1 β I τ = β P τ = 0 β I τ = β P τ = 0 β I τ = β P τ = 0 Individual earnings responses to taxes Nicole Bosch
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