Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production

This paper uses quasi-experimental variation in payroll taxes to estimate their incidence and investigate how firms use their input factors. We find that higher payroll tax rates lead to large employment responses and have no effects on employee earnings. As payroll taxes increase, firms substitute away from low-skilled, routine and manual workers towards more productive workers and also reduce investments. Our results imply that, contrary to the canonical tax incidence model, firm-level production and input factor choices are affected by payroll taxes.