Policy Thresholds as Growth Barriers: Theory and Evidence from a Payroll Tax Notch

Sami Jysmä, Youssef Benzarti and Jarkko Harju

No 12821, CESifo Working Paper Series from CESifo

Abstract: Discrete policy thresholds are pervasive in tax and regulatory systems and can substantially distort behavior. We show that notches acting as barriers to mobility within a distribution generate distortions extending far beyond the threshold. The same mechanism biases conventional difference-in-differences estimators, and we propose a new methodology to recover causal effects. Applying the method to the abolition of a size-based payroll tax notch, we find that the notch reduced the number of firms above the threshold by 18 percent and lowered treated firms' employment, capital stock, and value added by 10 percent, whereas conventional difference-in-differences estimates imply negligible effects.

Keywords: size-based regulation; notches; difference-in-differences; payroll tax (search for similar items in EconPapers)
JEL-codes: C01 H25 H30 (search for similar items in EconPapers)
Date: 2026
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