Taxes on Factors of Production: Their Effects on Factor Proportions and Inflation

In the last 25 to 30 years, payroll taxes and subsidies for investment have substantially altered relative factor prices facing firms. This paper presents theoretical and empirical findings on how these taxes and subsidies have affected long-run factor substitution in U.S. manufacturing industries a...

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Bibliographic Details
Main Authors: Bowes, Marianne, Brechling, Frank, Utgoff, Kathleen C, Vavrichek, Bruce
Format: Report
Language:English
Subjects:
ECONOMETRICS
ECONOMIC MODELS
ECONOMICS
Economics and Cost Analysis
EMPLOYMENT
ESTIMATES
Factors of production
FEMALES
INDUSTRIAL PRODUCTION
INDUSTRIES
INVESTMENTS
JOBS
LABOR
MALES
MANUFACTURING
MONEY
PE65154N
PRODUCTION
RATES
RATIOS
SALARIES
SECURITY
SOCIAL SECURITY
TAXES
U/A Reports
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Summary:In the last 25 to 30 years, payroll taxes and subsidies for investment have substantially altered relative factor prices facing firms. This paper presents theoretical and empirical findings on how these taxes and subsidies have affected long-run factor substitution in U.S. manufacturing industries and the short-run effects of payroll taxes on inflation in the economy as a whole. Neoclassical theory suggests that payroll taxes and investment subsidies will lead to substitution of capital for labor in production. In the analysis of factor substitution, quarterly time series data were used to estimate factor demand equations. The empirical results were mixed. The effects of input prices on the demand for factors were strong and in the expected direction. The tax variables were not found to have uniformly strong effects, although some results do support the neoclassical theory of factor demand. The analysis of labor supply focuses on participation, the dimension of supply displaying the most noncyclical variation. For males, participation was closely related to the likelihood of finding a job, as measured by the ratio of employment to labor force; but effects were not found for other variables, including the real wage rate. For females, the real wage rate was a determinant of participation as well as the probability of finding employment was a determinant of participation. For neither sex was a robust relationship found between the Social Security tax variables and labor supply...Costs, Econometrics, Economic models, Industrial production, Inflation(Economics), Investments, Labor supply, Manufacturing, Taxes.