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How Do Firms Respond to Place-Based Tax Incentives?

Hyejin Ku (), Uta Schönberg () and Ragnhild C. Schreiner ()
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Uta Schönberg: University College London, Department of Economics, CReAM, and Institute for Employment Research (IAB)
Ragnhild C. Schreiner: University College London, Department of Economics, CReAM, and Ragnar Frisch Centre for Economic Research

Authors registered in the RePEc Author Service: Uta Schoenberg

No 1811, CReAM Discussion Paper Series from Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London

Abstract: In this paper, we evaluate the effects of payroll tax changes on firm behavior, by exploiting a unique policy setting in Norway, where a system of geographically differentiated payroll taxes was suddenly abolished due to an EU regulation. We find that firms are only partially able to shift the increased costs from higher payroll tax rates onto workers’ wages. Instead, firms respond to the tax increase primarily by reducing employment. The drop in employment following the tax reform is particularly pronounced in labor intensive firms—which experience a larger windfall loss due to the tax reform than non-labor intensive firms—and in multi-establishment firms—which respond to the payroll tax increase in part by reducing the number of establishments per firm. Overall, our findings point to liquidity effects whereby a sudden and largely unexpected payroll tax increase aggravates firms’ liquidity constraints, forcing them to cut employment to bring down costs.

Keywords: Payroll taxes; regional tax incentive; firm behavior; labor demand (search for similar items in EconPapers)
JEL-codes: D22 H25 H32 J18 J23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur, nep-lma, nep-pbe and nep-pub
Date: 2018-08
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Persistent link: https://EconPapers.repec.org/RePEc:crm:wpaper:1811

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