The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance

35 Pages Posted: 19 Jun 2000 Last revised: 23 Sep 2010

See all articles by Patricia M. Anderson

Patricia M. Anderson

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Bruce D. Meyer

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies; National Bureau of Economic Research (NBER)

Date Written: August 1995

Abstract

In this paper we theoretically and empirically examine the common, but previously unexamined, case of a firm-varying tax which 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 which vary across firms and are analogous to experience-rated taxes. We present a theoretical model which 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.

Suggested Citation

Anderson, Patricia M. and Meyer, Bruce D., The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance (August 1995). NBER Working Paper No. w5201. Available at SSRN: https://ssrn.com/abstract=225265

Patricia M. Anderson (Contact Author)

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2532 (Phone)
603-646-2122 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bruce D. Meyer

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies ( email )

1155 East 60th Street
Chicago, IL 60637
United States
(773) 702-2712 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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