The Incidence of Payroll Taxation: Evidence from Chile

Jonathan Gruber ()

No 5053, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Despite the growing reliance on payroll taxation worldwide, there is limited evidence on the incidence of payroll taxes. I provide new evidence by examining the experience of Chile before and after the privatization of its Social Security system. This policy change led to a sharp exogenous reduction in the payroll tax burden on Chilean firms; the average payroll tax rate in my sample fell from 30% to 5% over this six year period. I use data from a census of manufacturing firms, which contains information on firm specific tax payments and average wages. I find strong evidence that the incidence of payroll taxation was fully on wages, with no effect on employment. A potential weakness with this approach is that some of the variation in firm-specific tax rates may be spurious, for example due to measurement error in wages. I attempt to surmount this problem by using a variety of different estimators, all of which yield consistent evidence of full shifting.

JEL-codes: H22 (search for similar items in EconPapers)
Date: 1995-03
Note: LS PE
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Published as Gruber, Jonathan. "The Incidence Of Payroll Taxation: Evidence From Chile," Journal of Labor Economics, 1997, v15(3,Jul), Part 2, S72-S101.

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