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

55 Pages Posted: 22 Feb 2010 Last revised: 11 Jul 2010

See all articles by Emmanuel Saez

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Manos Matsaganis

Athens University of Economics and Business

Panos Tsakloglou

Athens University of Economics and Business - Department of International and European Economic Studies; IZA Institute of Labor Economics

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Date Written: February 2010

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.

Suggested Citation

Saez, Emmanuel and Matsaganis, Manos and Tsakloglou, Panogiotis, Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece (February 2010). NBER Working Paper No. w15745, Available at SSRN: https://ssrn.com/abstract=1556110

Emmanuel Saez (Contact Author)

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Manos Matsaganis

Athens University of Economics and Business ( email )

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Panogiotis Tsakloglou

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

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