The Incidence of Payroll Taxation: Evidence from Chile

38 Pages Posted: 19 Jun 2000 Last revised: 24 Apr 2022

See all articles by Jonathan Gruber

Jonathan Gruber

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1995

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.

Suggested Citation

Gruber, Jonathan, The Incidence of Payroll Taxation: Evidence from Chile (March 1995). NBER Working Paper No. w5053, Available at SSRN: https://ssrn.com/abstract=225832

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