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This implies that at most one of gross earnings, net earnings, and labour cost can be continuous at a contribution ceiling. Footnote 2. Given that individuals and firms have preferences defined over net earnings and labour costs respectively, we might expect the distributions of each to be continuous around the threshold under certain conditions.
For example, if labour supply is perfectly inelastic, labour demand perfectly elastic e. Conversely, if labour supply is perfectly elastic, labour demand inelastic and preferences are smoothly distributed, we would expect the full burden of any SSCs to fall on employers and for the distribution of net earnings to be smooth and therefore to see a positive discontinuity in the distribution of both gross earnings and labour cost.
However, as gross earnings are economically irrelevant in the standard model, there is little reason to expect gross earnings to be continuous at the contribution ceiling: it reflects neither the preferences nor marginal productivity of individuals, and is therefore irrelevant for the decisions of both firms and individuals. In the next section, we outline an empirical approach to test for a discontinuous shift in the density of gross earnings at a contribution ceiling.
The presence of a gap in the distribution of gross earnings at a ceiling, arising from behavioural responses to the different tax rates above and below, may serve to obscure the mechanical discontinuity described above.
As neither a dip nor gap is observable, the papers in this special issue apply a straightforward test for a step-change in the distribution of gross earnings to infer the incidence of SSCs. Our primary test for whether there is a step-change in the distribution of gross earnings is whether the coefficient on this indicator, normalised by the density at the SSC ceiling, is statistically different from 0. A negative coefficient indicates a downwards shift in the density of gross earnings, which may be consistent with the full incidence of SSCs on workers, whereas a positive coefficient may be consistent with full incidence of SSCs on employers.
Footnote 3 This extends the local linear density estimator of Cheng et al. However, this test is not entirely suitable for our purposes because it tests for a discontinuity in the density exactly at the threshold, comparing only an epsilon above and epsilon below.
Such a discontinuity is necessary for the mechanical step-change in density that we are interested in, but it is not sufficient: the density must also continue to be different further above from the threshold. As a result, we place greater weight on results from the polynomial approach. In order to apply this empirical approach, we require large datasets that contain detailed information on the earnings of individuals, otherwise classical measurement error may lead us to make type I or II errors.
We also require an accurate measure of the base that SSCs are levied on, so that we can correctly identify the earnings of individuals relative to the contribution ceiling; typically gross employment earnings, as SSCs are usually not levied on self-employment or savings income.
The papers in this volume—which we now summarise—use administrative or quasi-administrative data that fulfils both these criteria. In this section, we briefly summarise the findings of the country papers, before concluding with a discussion of some possible interpretations, focusing on models of bargaining where gross rather than net earnings, or labour costs, are important.
All four papers focus on evaluating whether the gross earnings density g y is discontinuous at thresholds where the payroll tax rates drop. In contradiction with the standard model, all four papers find no discontinuity in gross earnings densities at these thresholds. Bozio et al. Taking advantage of a large number of kinks, they also exploit variations over time, across thresholds, and across group of workers executives vs non-executives in the size of the kinks in both the employer and employee SSC schedule to assess the incidence of both types of contributions separately.
They finally investigate whether the estimated discontinuities in the gross earnings distribution vary across time periods, the size of the corresponding kink, or the location of the kink in the earnings distribution median wage earners versus top wage earners.
None of those factors significantly affect the discontinuities, which remain inexistent in all cases. Kai-Uwe and Neumann provide a comprehensive analysis of the earnings cap for health insurance that existed in Germany over the period — They find that neither employers nor employees shift a substantial part of their SSC burden.
These results are consistent over the whole time period and in robustness checks corroborating previous findings. A small trend towards a slight increase in the SSC burden falling on employees is found, but its small magnitude and the statistical uncertainty attached to it lead the authors to the conclusion that their results are consistent with economic incidence coinciding with statutory incidence.
Adam et al. As with other papers in this volume, they fail to reject that the distribution of gross earnings is smooth around the threshold, consistent with economic mirroring statutory incidence. Finally, Bosch and Micevska-Scharf use a very rich Dutch administrative dataset for the period — Their data contain information on both the labour cost of firms and the gross earnings of employees.
This means that they can directly test for discontinuities in the distribution of both, whereas other countries are restricted to examining only gross earnings. Doing so, they find that the distribution of gross pay is smooth but that there is a positive discontinuity in the distribution of labour cost, confirming that the economic burden of employer SSCs seems to fall on employers, and that the absence of discontinuities in the gross earnings distribution is not simply due to measurement error.
The papers in this special issue provide evidence from hundreds of contribution caps in four large European countries that seems inconsistent with the standard static model of labour supply and demand that dominates the public economics literature. There is no dip or gap in the distribution of gross earnings around downwards kinks suggesting that earnings are completely inelastic with respect to the rate of SSCs , and we cannot reject the hypothesis that gross earnings are smooth and continuous around the threshold suggesting that statutory and economic incidence coincide.
In particular, the second of these findings is hard to reconcile with the standard model, as statutory and economic incidence should only coincide if the relative elasticities of labour supply and demand happen to be the same as the relative rates of employer and employee SSCs.
As the latter differ across both countries and time, it would be an extremely unlikely coincidence that the relative elasticities of labour supply and demand just happen to vary in a similar manner. However the standard model makes strong Walrasian assumptions: supply and demand are considered separately, and market clearing is assumed at any time. Furthermore, some important features of the labour market are neglected, such as matching frictions, productive complementarities between firms and workers, firm-specific human and physical capital investments, and wage bargaining.
The search and matching literature has studied intensively those mechanisms and showed how they generate job-specific surpluses or rents. This is, for example, because moving from one firm to another takes time, and it implies a loss of firm-specific human capital and of worker-firm complementarities.
Those rents on the labour market can be split in a variety of ways, possibly leading to a full range of possible different wages compatible with a given level of supply and demand.
Acknowledging the existence of rents therefore offers a natural way to rationalise the combined finding of an economic incidence close to the statutory one and of limited behavioural responses. Standard bargaining models such as Nash, Kalai or proportional bargaining do not however provide rent-sharing mechanisms directly consistent with our findings.
In the simplest rendition of those models, as in the standard static model described above, the statutory incidence of SSCs should not matter. Conventions or norms regarding bargaining and the salience of the various earnings concepts during the negotiations are likely to play a role.
Institutions such as unions, or pay fairness norms and reference points may also matter. We now review how those possible determinants of wage setting in a bargaining framework can provide possible explanations for our findings.
A key convention likely to play a role is that bargaining is typically based on gross earnings rather than labour costs or net earnings. Even if firms and workers ultimately care only about labour costs and net earnings respectively, it may be costly to calculate these from gross earnings. Knowing in advance the amount of SSCs they will have to pay indeed requires economic actors to know and apply without mistake the computation rules for those contributions.
In the countries we study here, the opportunity cost of doing so can be high: see, for example, the complex rules described by Bozio et al. If the cost to acquire this information is higher than the expected gain during the bargaining process, firms and workers may decide to negotiate on gross earnings without converting those earnings in a metric that directly matters to them. The cost to acquire the relevant information is not the only possible reason why the statutory incidence can matter.
Even in countries where SSCs are relatively straightforward to compute such as the UK , the norm to bargain on posted wages still makes the other earnings concepts less salient and possibly harder to use during the negotiations.
Individual negotiation norms may for example imply that some types of arguments weigh more than others during the negotiations. If a consideration is not customary and never used by economic actors, it could be awkward and counter-productive to use it. For example, it might be hard for a worker whose earnings have reached a concave kink in the SSCs schedule to argue during a face-to-face annual negotiation that pay raises in terms of posted wages have become less costly to her employer, so that she can get a higher raise.
As argued by Saez et al. For example, an employer engaged in pay negotiations who proposed an across-the-board rise defined in terms of labour cost to reflect increased aggregate productivity would in effect be offering a proportionally lower increase to workers paid below an SSC ceiling than to those above, which could adversely impact morale and productivity inside the firm. This is because the standard reference variable used for wage comparisons between workers is posted wages defined as gross earnings.
Again, the fact that other earnings concepts are less salient to workers renders harder and less intuitive earnings comparisons based on those concepts.
Note that pay fairness norms are compatible with the idea that workers bear the cost of SSCs at the firm level. Instead of discriminating between workers because of their individual SSCs rate, firms simply pass on all their employees the extra cost induced by having a larger share of workers typically paying large amounts of SSCs.
The mechanisms discussed so far—individual negotiations norms and pay fairness norms—apply when wages are directly determined at the individual level, with possible account of interactions between workers. Individual negotiations are more likely to arise for high-wage earners and senior white-collar workers. As many of the thresholds and caps in the SSC schedule are often located high up in the earnings distribution, the results presented in this issue apply primarily to such workers.
For those whose earnings tend to be set by collective bargaining, additional norms regarding collective negotiations can also play a role. In the countries we study, firm-level or industry-level negotiated pay scales when they exist are expressed in terms of gross earnings. This suggests that SSCs may not be systematically considered during the negotiations. A closer look to collective agreements provides further evidence. In France for example, gross earnings scales are posted in each industry branch for four distinct occupation groups clerks, blue collars, technicians, and managers.
For each of these groups, the industry collective agreement specifies a series of minimum gross earnings to be paid according to seniority and the exact qualification. Footnote 4 A quick examination of those complex and detailed scales suggests they are not systematically affected by the different rates of SSCs that apply. Pay fairness and bargaining norms might then explain why the economic incidence of SSCs seems equal to their statutory incidence in a partial equilibrium model.
You can pay this tax when you pay estimated taxes on a quarterly basis. The self-employment tax deduction is an above-the-line deduction that you can use to lower your income tax bill. A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. The wage limit changes almost every year based on inflation. That has been the case since January 1, The Additional Medicare Tax rate is 0.
So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2. You can calculate how much you owe using Form Just about everyone pays FICA taxes, including resident aliens and many nonresident aliens. But there are some exceptions. For example, college students are exempt from paying FICA taxes on the wages they earn from an on-campus job.
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