The Effects of Changes in Business Taxation on Firms, Workers and Local Labor Markets (Joint with Mimosa DiStefano and Christian Dustmann)

This seminar will take place on Zoom

In this paper, we paint the most comprehensive picture to date on how firms, workers and local labor markets adjust to changes in business tax rates. We focus on Germany where business tax rates — taxes on profits that apply to both incorporated and unincorporated firms — are set at the municipality level, and there is considerable variation in business tax rates both across municipalities (even within commuting zones) and over time, giving rise to a difference-in-difference design. We find that an increase in the business tax rate by 1 % reduces municipality employment by 0.35%, municipality wages by 0.12% and establishment wages by 0.065%. Employment decreases particularly strongly in high-wage and large establishments—that is, establishments located higher up the job ladder—explaining why municipality wages decline by more than establishment wages following a business tax hike. Higher business tax rates slow down the rate at which workers move up the job ladder and thereby contribute to lower individual wage growth.