Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece

Emmanuel Saez, Manos Matsaganis and Panos Tsakloglou

No 15745, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the response of earnings to payroll tax rates using a cohort-based reform in Greece. All individuals who started working on or after 1993 face permanently a much higher earnings cap for payroll taxes, creating a large and permanent discontinuity in marginal payroll tax rates by date of entry in the labor force for upper earnings workers. Using full population administrative Social Security data and a Regression Discontinuity Design, we estimate the long-term incidence and effects of marginal payroll tax rates on earnings. Standard theory predicts that, in the long run, new regime workers should bear the entire burden of the payroll tax increase (relative to old regime workers). In contrast, we find that employers compensate new regime workers for the extra employer payroll taxes but not for the extra employee payroll taxes. We do not find any evidence of labor supply responses around the discontinuity, suggesting low efficiency costs of payroll taxes. The non-standard incidence results are the same across firms of different sizes. Tax incidence, however, is standard for older workers in the new regime as they bear both the employee and employer tax. Those results, combined with a direct small survey of employers, can be explained by social norms regarding seniority-based pay which create a growing wedge between pay and productivity as workers age.

JEL-codes: J23 J38 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-acc, nep-age, nep-lab and nep-pbe
Note: LS PE
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Published as Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 493-533.

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Related works:
Journal Article: Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece (2012)
Working Paper: Earnings Determination and Taxes: Evidence from a Cohort-Based Payroll Tax Reform in Greece (2010)
Working Paper: Earnings Determination and Taxes: Evidence from a Cohort-Based Payroll Tax Reform in Greece (2010)
Working Paper: Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece (2010)
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