Payroll taxation increases inequality at the top

In recent decades, inequality of household income has increased globally. A common trend is increased income inequality at the top of the distribution. The sources of this trend are a matter of debate. Increased demand for analytical and managerial skills is said to have strongly increased labor incomes at the top. Other scholars have indicated that structural conditions, such as financialization or favorable taxation, have benefited top-earning households. Here, we contribute to the latter line of reasoning. We show that payroll taxation reinforces income inequality at the top. Such taxation has large fiscal volume and redistributive power. However, our knowledge about the distributional consequences of payroll taxation as a tax scheme is remarkably thin. We claim that payroll taxes are central to understanding income inequality. Many countries, such as Germany and the US, restrict payroll taxes to a maximum amount, resulting in significant payroll tax-exempted incomes for high-earning households. Strongly growing top-labor incomes thus lead to increased payroll tax-exempted incomes for households at the upper parts of the distribution and, consequently, to higher income dispersion. We use Germany (1992–2017), a highly redistributive country, as a case study. Our empirical results suggest that: a) households increasingly profit from payroll-exempted labor incomes across the upper quarter; b) this benefit has increased over time; and c) increased amounts of payroll tax-exempted labor income explain up to 60% of income dispersion at the top of the distribution. We discuss the generalizability of our case study for other countries.

Payroll taxes increase reserves in Ukraine

The authors analyzed the reformation of the payroll taxation mechanism in Ukraine, identified wage differences of the employees at the large, medium-sized and small business entities, figured out the reserves to increase tax revenues and cover the deficit of the Pension Fund of Ukraine by decreasing shadow wages and improving payroll taxation in Ukraine. Significant attention is paid to the salaries of the top managers of large business entities as a possible field of applying progressive taxation of personal income. Based on the analysis of the EU countries experience, the authors suggest imposing the second progressive personal income tax rate of 32% for the monthly income that exceeds 15 minimum wages. As well, the abolishment of the maximum unified social contribution base is recommended. In the paper, the authors prove the importance of reducing the level of the shadow economy in Ukraine by forming a public trust to the government policy and using accumulated tax funds appropriately. It has been proved that by reducing the shadowing of the Ukrainian economy to the EU level, the deficit of the Pension Fund of Ukraine can be covered only partially. This fact determines the necessity for Ukraine to ensure economic growth and increase wages.

Revenue Sources

This chapter looks at the alternative sources of financing for social protection in Europe. The main source is payroll taxation. Two issues are often raised: that of the regressivity of payroll taxation and that of enlarging a tax base that is increasingly restricted to salaried work. Given that shrinking base, European governments are searching for alternative sources of finance, mainly consumption tax and income tax. In most countries, payroll taxation is an integral part of the social insurance compact, which involves unions and management. To the extent that payroll taxes are perceived as contributions or premiums paid for an insurance service, they are expected to be better accepted than other taxes.

The impact of payroll taxation on employment in a third world setting: personal services in Brazilian nonamazonian states 1940-1980

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