Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift

Fei Han

doi:doi:10.11648/j.ijebo.20200804.13

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Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift

Fei Han

Published in International Journal of Economic Behavior and Organization (Volume 8, Issue 4)

Received: 23 December 2020 Accepted: 5 January 2021 Published: 12 January 2021

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Abstract

Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.

Published in	International Journal of Economic Behavior and Organization (Volume 8, Issue 4)
DOI	10.11648/j.ijebo.20200804.13
Page(s)	101-106
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Tax Incidence, Social Security Tax, Collection Entity Shift

References

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[2]	Anderson, P., and B. Meyer. 2000. “The Effects of The Unemployment Insurance Payroll Tax On Wages, Employment, Claims And Denials” Journal of Public Economics, 78 (1-2), pp.81-106.
[3]	Angrist, J., and J. Pischke. 2009. Mostly Harmless Econometrics: An Empiricist’s Companion. New Jersey: Princeton University Press.
[4]	Besley, T., and A. Case. 2000. “Unnatural Experiments? Estimating the Incidence of Endogenous Policies” Economic Journal, 110 (467), pp. F672-F694.
[5]	Gruber, J., and M. Lettau. 2004. “How Elastic Is the Firm’s Demand For Health Insurance?” Journal of Public Economics, 88 (7-8), pp. 1273-1294.
[6]	Kugler, A., & M. Kugler. 2009. “Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia” Economic Development and Cultural Change 57 (2), pp. 335-358.
[7]	Kugler, A. and M. Kugler and L. Herrera-Prada. 2017. “Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform” Economia Journal of The Latin American and Caribbean Economic Association, 0 (1), pp. 3-40.
[8]	Li Z. and Wu M. 2011. “Estimating the incidences of the recent pension reform in China: evidence from 100,000 manufacturers”. BBVA Research working paper, No. 11/38.
[9]	Liu, J. Q. 2010. “Resource, Incentive, and Political Interest: A Longitude Study of China’s Social Security Collection System”. China Social Science, 2010 (3).
[10]	Nie, H. H, T. Jiang, and R. D. Yang. 2012. “Status and Problems in the Annual Survey of China’s Above-Scale Manufacturing Firms Dataset”. World Economy, 2012 (5).
[11]	Nielsen, I. and R. Smyth. 2008. “Who bears the burden of employer compliance with social security contributions? Evidence from Chinese firm level data”. China Economic Review. 19 (2008), pp. 230-244.
[12]	Rosen, H. and T. Gayer. 2021. Public Finance (the Tenth Edition). New York: The McGraw-Hill.
[13]	Saez, E., M. Matsaganis and P. Tsakloglou, 2012. “Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece” The Quarterly Journal of Economics, Oxford University Press, 127 (1), pp. 493-533.
[14]	Saez, E., B. Schoefer and D. Seim. 2017. “Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden”. NBER Working Paper, No. 27936.
[15]	Summers, L. “Some Simple Economics of Mandated Benefits”. American Economic Review, 79: 177-183.

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APA Style

Fei Han. (2021). Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. International Journal of Economic Behavior and Organization, 8(4), 101-106. https://doi.org/10.11648/j.ijebo.20200804.13

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ACS Style

Fei Han. Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. Int. J. Econ. Behav. Organ. 2021, 8(4), 101-106. doi: 10.11648/j.ijebo.20200804.13

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AMA Style

Fei Han. Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. Int J Econ Behav Organ. 2021;8(4):101-106. doi: 10.11648/j.ijebo.20200804.13

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@article{10.11648/j.ijebo.20200804.13,
  author = {Fei Han},
  title = {Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {8},
  number = {4},
  pages = {101-106},
  doi = {10.11648/j.ijebo.20200804.13},
  url = {https://doi.org/10.11648/j.ijebo.20200804.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20200804.13},
  abstract = {Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.},
 year = {2021}
}

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TY  - JOUR
T1  - Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift
AU  - Fei Han
Y1  - 2021/01/12
PY  - 2021
N1  - https://doi.org/10.11648/j.ijebo.20200804.13
DO  - 10.11648/j.ijebo.20200804.13
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 101
EP  - 106
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20200804.13
AB  - Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.
VL  - 8
IS  - 4
ER  -

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Author Information

Fei Han

School of Public Finance and Taxation, Central University of Finance and Economics, Beijing, China

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Plain Text BibTeX RIS

APA Style

Fei Han. (2021). Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. International Journal of Economic Behavior and Organization, 8(4), 101-106. https://doi.org/10.11648/j.ijebo.20200804.13

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ACS Style

Fei Han. Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. Int. J. Econ. Behav. Organ. 2021, 8(4), 101-106. doi: 10.11648/j.ijebo.20200804.13

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AMA Style

Fei Han. Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift. Int J Econ Behav Organ. 2021;8(4):101-106. doi: 10.11648/j.ijebo.20200804.13

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@article{10.11648/j.ijebo.20200804.13,
  author = {Fei Han},
  title = {Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {8},
  number = {4},
  pages = {101-106},
  doi = {10.11648/j.ijebo.20200804.13},
  url = {https://doi.org/10.11648/j.ijebo.20200804.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20200804.13},
  abstract = {Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift
AU  - Fei Han
Y1  - 2021/01/12
PY  - 2021
N1  - https://doi.org/10.11648/j.ijebo.20200804.13
DO  - 10.11648/j.ijebo.20200804.13
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 101
EP  - 106
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20200804.13
AB  - Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.
VL  - 8
IS  - 4
ER  -

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