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Payroll Tax Incidence: Evidence from Unemployment Insurance

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June 2024

Written by: Audrey Guo

Working Paper Number:

CES-24-35

Abstract

Economic models assume that payroll tax burdens fall fully on workers, but where does tax incidence fall when taxes are firm-specific and time-varying? Unemployment insurance in the United States has the key feature of varying both across employers and over time, creating the potential for labor demand responses if tax costs cannot be fully passed through to worker wages. Using state policy changes and administrative data of matched employer-employee job spells, I study how employment and earnings respond to unexpected payroll tax increases for highly exposed employers. I find significant drops in employment growth driven by lower hiring, and minimal evidence of passthrough to earnings. The negative employment effects are strongest for young workers and single-establishment firms.

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Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

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exogeneity, endogeneity, payroll, earnings, employee, employment effects, employ, employed, labor, recession, employment growth, incentive, hiring, workforce, employing, worker wages, worker, hire, employment wages, increase employment, tax, workers earnings, unemployment rates, employment earnings, impact employment, taxation

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National Science Foundation, County Business Patterns, Social Security, Unemployment Insurance, North American Industry Classification System, Alfred P Sloan Foundation, Longitudinal Employer Household Dynamics, NBER Summer Institute, Quarterly Census of Employment and Wages, Census Bureau Disclosure Review Board, Disclosure Review Board, Federal Statistical Research Data Center

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