A General Equilibrium Model of the Payroll Tax Incidence of State Unemployment Insurance Systems

Abstract

PUBLIC FINANCE REVIEW Murphy / TAX INCIDENCE OF STATE UNEMPLOYMENT INSURANCEThis article presents a simple, general equilibrium model of unemployment insurance tax incidence for the United States. It is argued that the traditional partial-equilibrium explanation of payroll tax incidence is not appropriate in this case due to the unusual characteristics of the U.S. system. Specifically, the U.S. unemployment insurance tax system is an amalgam of state-run systems, across which tax rates and tax bases vary considerably. Moreover, it is argued that low taxable wage bases in conjunction with differing rates of geographic mobility across worker groups have important implications that can best be seen using a general equilibrium approach. The article's main conclusion is that application of a general equilibrium approach to this particular question of payroll tax incidence yields a result basically opposite of what the standard partial-equilibrium approach would predict.

The impact of unemployment insurance taxes on wages

“…Given the multi-market nature of the problem, a general equilibrium approach to the question is warranted. I have worked out the implications of a two-sector two-factor general equilibrium model of payroll tax incidence in a previous paper (Murphy, 2003). Rather than repeat the details of that model here, I will instead briefly sketch the intuitive sense of the model's implications.…”