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Incidence effects of proposed reforms for the payroll tax in Finnish manufacturing

Pasi Holm, Seppo Honkapohja () and Erkki Koskela
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Pasi Holm: University ofHelsinki
Erkki Koskela: University ofHelsinki

Finnish Economic Papers, 1993, vol. 6, issue 2, 67-78

Abstract: The main proposals for the reform of payroll-based employers' social security contributions have been the (partial) replacement of the contribution by increased sales tax and the so called SII-contribution, in which the base would consist of the wage bill and the operating margin of the firm. In this study models for the determination of wages, employment and investment in Finnish industry are estimated. These models are then used to simulate the effects of the proposed reforms on the same variables. The effects of both reform proposals are qualitatively similar. Both reforms would raise nominal wages and employment. They would also reduce capital formation. Real wages would probably remain roughly constant in the case of the SII-contribution, while they would fall in the shift to sales taxation. In percentage terms, the effects on the real variables would be small, less than one percentage point in magnitude. The effects on real wages depend on the degree of shifting of the increased sales tax or SII-contribution to output prices. Both reform proposals aim at moving away from a method of finance that is based entirely on a payroll tax towards a general tax on factors of production.

JEL-codes: H22 J38 (search for similar items in EconPapers)
Date: 1993
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