Estimating the impacts of payroll taxes: Evidence from Canadian employer–employee tax data

Abstract

AbstractIn this paper, we use linked employer–employee administrative tax data from Canada to estimate the impact of payroll taxes on a variety of firms’ and workers’ outcomes. For one province, we are able to exploit a policy change in the payroll tax rate to estimate its impact on the firm's level of employment, average wage and average sales, with difference‐in‐differences models, taking into account firm‐level unobserved heterogeneity. Additionally, taking advantage of the nature of linked data, we estimate wage equations with both fixed worker and firm fixed effects. We find no impact on employment and average sales, but significant impacts on wages, implying that payroll taxes are passed almost entirely to workers in the form of lower wages.