New Employer Payroll Taxes and Entrepreneurship
Early Career Research Award
The goal of this project is to evaluate the impact of payroll taxes on new employers and small businesses, and the extent to which this contributes to declining business dynamism and state tax competition. Using state variation in Unemployment Insurance (UI) tax schedules and administrative data from the U.S. Census Bureau, we plan to estimate how UI new employer taxes in the year of entry affect (a) entry/location decisions, (b) selection into entry, and (c) survival/outcomes conditional on entry. Our main research design leverages cross-sectional variation in UI taxes by state and industry to assess whether higher tax rates discourage firm entry and growth. We also plan to leverage variation in the timing and expected magnitude of tax changes as a firm graduates from new employer status to their state’s experience rating system, in order to study whether changes in a firm’s UI tax exposure affects its survival and growth.