The general equilibrium effects of social security contributions under alternative incidence assumptions

Abstract

This study deals with the economic effects of a firm's social security taxes in the Catalan economy, using an applied general equilibrium model. A novel aspect of the analysis is that it hypothesizes about the incidence of firm's contributions on both employers and employees. The results of a reduction in firm's social security taxation are sensitive to the incidence assumption. In particular, the study shows that the effects on regional unemployment, income distribution and relative prices of factors depend considerably on the incidence hypothesis assumed.

Acknowledgements

The authors acknowledge the support of the Ministerio de Educación y Cultura (grants SEC2000-0796, SEC2000-0834, SEC2003-06080 and SEC2003-06630), and the Generalitat de Catalunya (grant XT2002-0037). The first author is also grateful for the support of CentrA (Fundación Centro de Estudios Andaluces).

Notes

The obligation to collect the firm's social taxes falls on the employers, which is why this taxation is always represented as an element of the productive cost. However, by reducing the wages paid by the employer, the tax burden can be borne in part or completely by the employee. In this situation, the conventional incidence hypothesis may not be able to capture the effects of the social taxation.

The data to implement this classification is in Calonge and Manresa (2001).

Llop and Manresa (1999) describe this database.

The assumption that the burden of employers’ contributions is completely borne by employees is supported by the empirical literature.