Firms and Policy Incidence (available upon request)

I study the role of firms for the consequences of public policies that target workers by developing a framework to incorporate firms in welfare analysis. Building on the existing sufficient statistics frameworks, I introduce heterogeneity across firms, and involuntary unemployment caused by firm’s employment decisions. The model rationalizes the use of firm-level causal estimates of the effects of a policy to study its welfare impact. I apply the model to various policies studied in the literature. The new approach significantly changes the welfare conclusions for most policies, suggesting a pivotal role of firms for the passthrough of public policies.

Firm-level Tax Incidence: Redistribution of Labor Costs Within the Firm

How is the cost of payroll taxes redistributed within the firm? Standard tax incidence theory is based on the assumption that labor markets are perfectly competitive and firm-idiosyncratic shocks to the cost of labor have no effects on the wages of incumbent workers. However, labor market frictions generate quasi-rents at the firm, whose elasticity determines part of the effect of payroll taxes on wages. I attempt to identify this component by studying how wages respond to firm-level changes in the cost of labor for low-paid employees. I use administrative data for the universe of French private sector firms that I match to information on paid social security contributions to study a payroll tax reform implemented in France in 2003. This policy changed payroll tax subsidies for low-paid workers leaving tax rates unchanged for other workers. I exploit variation in the wage distribution of the subset of low-paid workers to create firm-level shifts in the average payroll tax rate of low-paid employees and I use them as an instrument for the total change in the cost of labor. I show that tax cuts affect both low-paid and high-paid employees by increasing their net wages. This redistribution reduces the effectiveness of the policy in transferring resources to low-paid workers. I then estimate a structural model to evaluate the economy-wide redistribution of the benefits of lower taxes and the contribution of firms to the passthrough of the policy.

In the Business of Compliance: Firm Revenue Manipulation in Response to the Audit System

We study whether tax agencies can selectively disclose certain details of their audit selection criteria to foster spontaneous tax compliance. We rely on the Italian Sector Studies, a policy creating salient file-specific discontinuities in the tax audit schedule of small firms and the self-employed, and the universe of Sector Study files over 2007-2010. The featured audit incentives result in substantial revenue responses, which we rationalize with a simple non-linear budget model of firm revenue manipulation at tax filing. The observed bunching and heterogeneity in tax rates allow us to structurally estimate prevailing levels of equilibrium evasion absent the Sector Studies. On average, we predict revenue underreporting well in excess of one third of median reported profits. The substantial geographical dispersion in our evasion predictions maps the available tax gap estimates, while we replicate literature findings of stronger underreporting among downstream industries. Based on our structural model, we determine that selective disclosure results in 3.5-7% higher mean declared revenues relative to a sensible range of counterfactual audit scenarios. In our context, this implies that the virtuous reporting incentives from disclosure outweigh the potential revenue costs from a downward revision of audit risk expectations.