Missing social security contributions: the role of contribution rate and corporate income tax rate
- PDF / 1,821,433 Bytes
- 32 Pages / 439.37 x 666.142 pts Page_size
- 100 Downloads / 200 Views
Missing social security contributions: the role of contribution rate and corporate income tax rate Xiaoxue Li1 · Liu Tian2 · Jing Xu2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Social security compliance by firms is critical to the welfare of workers and the sustainability of the program. Partly because of weak law enforcement, social security evasion—failure to participate or only partially pay the contributions—is severe in developing countries. In this study, we examine how social security evasion by firms is determined by two policy parameters: social security contribution rate and corporate income tax rate. Using a novel longitudinal dataset of firms in China, we exploit city-by-year variations in social security contribution rate and variations in corporate income tax rate generated by a 2008 corporate tax reform. Findings suggest that the two policy parameters have opposite effects on social security evasion, namely social security contribution rate has a positive effect on evasion, and corporate income tax rate has a negative effect. The negative effect of corporate income tax is as expected because a high corporate tax rate reduces the effective costs of social security contributions, which are deductible. The estimated effects of the policy parameters are pronounced among private-owned domestic firms and firms in cities where a formal labor contract is less common. Findings suggest that corporate tax rate can be used as a companion policy instrument with social security contribution rate to combat social security evasion in developing countries. Keywords Social security contribution rate · Corporate income tax · Social security evasion · China JEL Classification H26 · H55
* Liu Tian [email protected] 1
Department of Economics, University of New Mexico, Albuquerque, NM, USA
2
School of Public Economics and Administration, Shanghai University of Finance and Economics, Shanghai, China
13
Vol.:(0123456789)
X. Li et al.
1 Introduction Maintaining a sustainable social security system is an essential objective of modern governments. A healthy social security system requires high compliance of firms and workers. In developing countries, however, the sustainability of social security systems is often questioned because of high levels of evasion (Bailey and Turner 2001; Mcgillivray 2001). In particular, firms or workers may underpay the contributions to social security or not participate. Failure to pay the required contributions would cause the social security fund to be insufficient. In Latin America, for example, high levels of evasion have led to a large deficit in the social security system in Uruguay, Colombia, Mexico, and Peru (Kritzer 2000). Social security evasion has negative consequences regarding the efficiency and equity of the economic system. All workers, including workers who fully comply, suffer from the benefits shortage when they retire. Moreover, firms that fully comply essentially incur higher labor costs than firms who evade and are thus
Data Loading...
