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

This paper analyzes the response of earnings to payroll tax rates using a cohort-basedreform in Greece. All individuals who started working on or after 1993 face permanently amuch higher earnings cap for payroll taxes, creating a large and permanent discontinuity inmarginal 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 DiscontinuityDesign, we estimate the long-term incidence and effects of marginal payroll tax rates onearnings. Standard theory predicts that, in the long run, new regime workers should bear theentire burden of the payroll tax increase (relative to old regime workers). In contrast, we findthat employers compensate new regime workers for the extra employer payroll taxes but notfor the extra employee payroll taxes. We do not find any evidence of labor supply responsesaround the discontinuity, suggesting low efficiency costs of payroll taxes. The non-standardincidence results are the same across firms of different sizes. Tax incidence, however, isstandard for older workers in the new regime as they bear both the employee and employertax. Those results, combined with a direct small survey of employers, can be explained bysocial norms regarding pay seniority which create a growing wedge between pay andproductivity as workers age....