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Social Security Contributions and the Business Cycle
Anna Almosova, Michael C. Burda and Simon Voigts
Social Security Contributions and the Business Cycle Anna Almosova Humboldt Universität zu Berlin and CRC 649 Michael C. Burda Humboldt Universität zu Berlin, CEPR, IZA and CRC 649 Simon Voigts Humboldt Universität zu Berlin and CRC 649 Abstract: We investigate the behavior of social security contributions (SSC) or
payroll taxation over the business cycle. We find a negative correlation of these
labor tax burdens with GDP in a majority of 25 OECD countries, i.e. falling in
booms and rising in recessions, thus resembling the “labor wedge” described by
Chari et al (2007). To understand the source of this correlation, we decompose
changes in effective SSC rates for each economy into statutory tax schedule
adjustments and those due to changes in the earnings distribution. Adjustments of
statutory tax rates resulting from the balanced budget principle appear to be an
important source of observed variation in many countries, especially for those
with empirically countercyclical payroll taxation. Cyclical changes in the earnings
distribution and thresholds on taxable income play only a secondary role. In the
context of a simple RBC model, we show that strict adherence to a balanced
budget rule can induce this form of behavior and that the intensity of correlation
depends on the presence of other sources of funding for the social security system.