Payroll Taxes vs. Wage Taxes: Non-Equivalence Results

Center for Economic Studies Working Paper at University of Munich, No. 143

Posted: 28 May 1998

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Ronnie Schöb

Freie Universitaet Berlin; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1997

Abstract

According to conventional wisdom the total tax wedge, which is the sum of payroll and wage taxes is sufficient to specify the distortion of wage formation caused by labour taxation. This paper casts doubt on this view by providing two reasons why this irrelevance conjecture may not hold in non-competitive labour markets when factors of production are complements. It is shown that gross nominal wages will increase if a revenue-neutral restructuring of labour taxes towards higher wage taxes reduces the wage elasticity of labour demand. In addition, it turns out that, even with constant labour demand elasticity, gross nominal wages increase as a result of higher wage taxes if the trade union's bargaining power is not comprehensive.

JEL Classification: H20, J51

Suggested Citation

Koskela, Erkki and Schöb, Ronnie, Payroll Taxes vs. Wage Taxes: Non-Equivalence Results (September 1997). Center for Economic Studies Working Paper at University of Munich, No. 143. Available at SSRN: https://ssrn.com/abstract=56281

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ronnie Schöb

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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