Economic theory concludes that the incidence of a tax doesn’t vary with who has the statutory incidence or remittance responsibility (the “invariance of incidence proposition”. In the case of employer and employee payroll taxes, the ultimate incidence should depend simply on the supply and demand of labor. Frictions, however, such as minimum wages, union contracts and evasion differentials from remittance responsibility may affect the final burden.
Given the important role payroll taxes play in funding social security programs and tax policy (26% of total OECD countries’ tax revenues), the question is why do governments differ in their employer and employee shares of social security contributions (SSC). As shown in the figure above, the average OECD country collected 61% of total SSC from employers in 2014; the employer share varies greatly across countries. Eleven OECD countries’ maximum employer payroll tax rates are over 10 percentage points greater than their maximum employee tax rate.
Most studies of payroll taxes don’t differentiate between employer and employee payroll taxes. Two recent studies find that employers bear a non-significant (one-third) share of payroll taxes (Melguizo et al. (2012), Gavrilova et al. (2015)), while Suez et al. (2012 and 2017) and Muller and Neumann (2016) find no employer shifting around contribution limits. One study finds that small employers are less likely to shift the payroll tax.
More empirical research is needed to help policymakers better understand the effects of payroll taxes. If employers bear some of the burden of payroll taxes, and potentially a greater burden of employer payroll taxes, then employer payroll taxes could adversely affect the demand for labor, particularly lower-wage workers, and affect business location decisions. If employees perceive their employee contributions to provide future social security benefits, then employee contributions may not affect their labor supply as much as other taxes.
In only six of the 35 OECD countries is the income tax greater than the payroll tax for the countries’ average wage earner, as shown in the figure below based on the new OECD Taxing Wages 2017 publication (AU, DK, IS, IR, NZ, US). The employer payroll tax is more than half the total tax wedge on average wage earners in 8 OECD countries (CZ, EE, ES, FR, IT, MX, SE).
Where there is a disconnect between economic theory and politicians’ and business’ views, more work is needed to strengthen the empirical backing of the economic theory and/or to better understand the mechanisms causing divergences from the theory.