Who benefits from tax incentives? The heterogeneous wage incidence of a tax credit

Abstract

Do workers gain from lower business taxes, and why? We estimate how a large French corporate income tax credit is passed on to wages and explore the firm-and employee-level underlying mechanisms. The amount of tax credit firms get depends on their payroll share of workers paid less than a wage threshold. Exposure to the policy thus varies both across workers depending on their wage and across firms depending on their wage structure. Using exhaustive employeremployee data, we find that half of the surplus generated by the reform falls onto workers. Wage gains load on incumbents in high-skill occupations. The wage earnings of low-skill workers -nearly all individually eligible -do not change. This heterogeneous wage incidence is unlikely to be driven by scale effects or skill complementarities. We find that the groups of workers benefiting from wage gains are also more likely to continue working for the same firm. Further, we show that firms do not change their wage-setting behavior in response to the individual eligibility status of workers as there is no bunching in the distribution of entrants' wages. Overall, our results suggest that the wage incidence of firm taxation operates collectively through rent-sharing and benefits workers most costly to replace.

Pennies from Haven: Wages and Profit Shifting

“…Departing from tax-induced rent sharing, Kline et al (2019) use U.S. patent allowances to examine how patent-induced shocks to firm performance translate into employee pay. Based on a unique linkage of patent applications to U.S. businesses and worker tax records, they infer that the earnings impact is heavily concentrated among board members and employees in the top quartile of the earnings distribution, a result reminiscent of the high-skill occupation results of Fuest et al (2018) and Carbonnier et al (2022). Given our theoretical discussion and preliminary data exploration in the next section, we expect similar results in our analysis and are careful to disentangle potential wage effects accordingly.…”

“…As a final robustness check found in the Online Appendix, we reestimated Table 7 for male and female workers separately. We do so in light of Fuest et al (2018) and Carbonnier et al (2022) who find that domestic tax reductions benefit men more than women. Suppose men are more likely to be found in the high-skill occupations (for example only about 10% of our CEOs are female).…”

“…Exploiting the age-based variation in payroll tax rates in a basic difference-in-differences design, they find strong employment effects for young workers but reject the standard prediction of frictionless labor market models that market wages fully absorb the tax cut. Using a French tax credit, Carbonnier et al (2022) estimate the pass-through of corporate taxes to wages, finding that workers in high-skill occupations saw an increase in wages following the tax reduction. Lowskill workers, on the other hand, saw no change.…”

Macroeconomic Implications of Changes in Corporate Tax Rates: A Review

“…Fuest et al (2018) also finds that the burden of wage reduction falls on the low‐skilled, women and young workers. Carbonnier et al (2022) examine the wage impact of French CIT credit, and report that the benefits of tax credit are not equally shared among workers. The study finds that a 1 per cent increase in tax credit leads to a 0.5 per cent increase in mean hourly wages at the firm level.…”

Long-Term Effects of Hiring Subsidies for Unemployed Youths—Beware of Spillovers

“…See, for example,Gruber and Krueger (1991),Gruber and Krueger (1994);Gruber (1997), as well as Meyer (1997, 2000). 2 See, for example,Saez et al (2012Saez et al ( , 2021;Bozio et al (2019);Westerberg (2021);Kim et al (2022);Carbonnier et al (2022). 3 See alsoSkedinger (2014);Egebark and Kaunitz (2018).4 Furthermore,Neumark and Grijalva (2017) shows that hiring subsidies adopted in the US during the Great Recession were made more effective in boosting job growth by targeting them at the unemployed or by making them refundable when job-creation goals were not met.…”