Working Paper: NBER ID: w27485
Authors: Youssef Benzarti; Jarkko Harju
Abstract: This paper estimates the effect of payroll tax cuts on firm activity 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 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 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. This shows that payroll tax cuts can make firms more resilient during downturns.
Keywords: Payroll tax cuts; Firm activity; Economic downturns; Great Recession
JEL Codes: H20; H22; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Payroll tax cuts (H29) | firm activity (M13) |
| Payroll tax cuts (H29) | firm resilience during economic downturns (G32) |
| Payroll tax cuts (H29) | employment of relatively more workers (J29) |
| Payroll tax cuts (H29) | investment and higher sales (G31) |
| Payroll tax cuts (H29) | persistence of positive effects on employment (J68) |