The
Incidence of a Firm-Varying Payroll Tax:
The Case of Unemployment Insurance
Patricia M. Anderson and
Bruce D. Meyer
Abstract
In this paper we theoretically and empirically examine
the common, but previously unexamined, case of a firm-varying tax
that is used to finance a fringe benefit. While we use data from
the experience-rated unemployment insurance (UI) system, it is important
to realize that differential treatment of firms (such as special
considerations for small business) under mandated benefits laws
leads to costs that vary across firms and are analogous to experience-rated
taxes. We present a theoretical model that highlights the importance
of considering this variation in taxes or costs both within and
across markets. We examine annual changes in either firm average
earnings and employment or individual worker earnings at the same
firm. This method removes unmeasured firm and worker characteristics,
and thus avoids the omitted variable bias that has plagued past
work on incidence and compensating differentials. Our results suggest
that most of the market level tax is borne by the worker. However,
this does not imply that there are no employment effects of the
tax. Rather, we find that individual firms can only pass on a small
share of the within market differences in the tax they face, leading
to substantial employment reallocation across firms.
Patricia M. Anderson, Department
of Economics, Dartmouth College Bruce D. Meyer, Department of Economics, Northwestern University
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