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

Jysmä, Sami, Youssef Benzarti and Jarkko Harju

No 21779, CEPR Discussion Papers from Centre for Economic Policy Research

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: Difference-in-differences; Payroll tax (search for similar items in EconPapers)
JEL-codes: C01 H25 H30 (search for similar items in EconPapers)
Date: 2026-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21779 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21779

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21779

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().