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

Working Paper: NBER ID: w15745

Authors: Emmanuel Saez; Manos Matsaganis; Panos Tsakloglou

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.

Keywords: Payroll Tax; Earnings; Tax Incidence; Labor Economics

JEL Codes: J23; J38

Causal Claims

Cause	Effect
employer payroll taxes (J32)	gross earnings of new regime workers (J39)
employee payroll taxes (J32)	net earnings of new regime workers (E25)
older workers in the new regime (J26)	burden of both employee and employer payroll taxes (J32)
social norms regarding seniority-based pay practices (J78)	observed tax incidence results (H22)