New Employer Payroll Taxes and Entrepreneurship

Audrey Guo and Melanie Wallskog
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Melanie Wallskog: Duke University

No 24-410, Upjohn Working Papers from W.E. Upjohn Institute for Employment Research

Abstract: How costly are taxes for young firms? In this paper, we demonstrate that even small payroll taxes significantly distort entry, growth, and hiring decisions. First, leveraging cross-sectional variation in the taxes faced by new employers, we find that higher taxes discourage new firms from hiring their first workers, with an elasticity of the number of new employers to taxes of -0.1. Second, studying changes in taxes after entry, we find that higher taxes lead more firms to exit, while also reducing employment for those who survive and leading some firms to avoid taxes by using non-taxable contract labor.

Keywords: firm entry; young firms; labor costs; unemployment insurance (search for similar items in EconPapers)
JEL-codes: H25 H71 L26 M13 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-ent, nep-pbe, nep-pub and nep-sbm
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