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Can Payroll Tax Cuts Help Firms During Recessions?

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  • Youssef Benzarti
  • Jarkko Harju

Abstract

This paper estimates the effect of payroll tax cuts on firm-level employment and balance-sheet outcomes during economic downturns. We use two regional payroll tax cuts in Finland as well as the onset of the Great Recession to estimate the effect of the recession on firms treated by the payroll tax cuts compared to a similar control group. When implemented, prior to the Great Recession, we estimate that the payroll tax cuts had limited effects on employment and balance-sheet outcomes of firms located in the treated regions. However, when the recession starts, some of its negative effects were substantially hampered by the previously enacted payroll tax cuts in treated firms. These employment effects are exacerbated for men and low-skilled employees. We also find that sales and profits in treated firms respond differently in treated firms during the recession. We provide some evidence showing that firms that are liquidity con- strained are the ones that exhibit the strongest response. This shows that payroll tax cuts can make firms more resilient during downturns, possibly by relaxing liquidity constraints.

Suggested Citation

  • Youssef Benzarti & Jarkko Harju, 2021. "Can Payroll Tax Cuts Help Firms During Recessions?," Working Papers 2131, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:2131
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    File URL: http://urn.fi/URN:ISBN:978-952-03-1945-8
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    Cited by:

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    2. Sven-Olov Daunfeldt & Anton Gidehag & Niklas Rudholm, 2021. "How Do Firms Respond to Reduced Labor Costs? Evidence from the 2007 Swedish Payroll Tax Reform," Journal of Industry, Competition and Trade, Springer, vol. 21(3), pages 315-338, September.
    3. Jacob, Martin & Vossebürger, Robert, 2022. "The role of personal income taxes in corporate investment decisions," Journal of Corporate Finance, Elsevier, vol. 77(C).
    4. Massenz, Gabriella, 2023. "On the behavioral effects of tax policy," Other publications TiSEM eb44a9f7-b859-480d-b2e4-4, Tilburg University, School of Economics and Management.
    5. Sam Desiere & Bart Cockx, 2021. "How Effective Are Hiring Subsidies to Reduce Long-Term Unemployment among Prime-Aged Jobseekers? Evidence from Belgium," CESifo Working Paper Series 9325, CESifo.
    6. Enrico Rubolino, 2022. "Taxing the Gender Gap: Labor Market Effects of a Payroll Tax Cut for Women in Italy," Cahiers de Recherches Economiques du Département d'économie 22.01, Université de Lausanne, Faculté des HEC, Département d’économie.
    7. Audrey Guo, 2023. "Payroll Tax Incidence: Evidence from Unemployment Insurance," Papers 2304.05605, arXiv.org.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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