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

Small businesses and the self-employed face greater opportunities to conceal their income sources relative to employees, leading to substantial tax gaps. Despite the magnitude of this problem, evidence on how these businesses comply with the tax system is still scarce. This paper aims to estimate revenue elasticities and perceived audit risk by exploiting a discontinuity in audit probability around a firm-specific revenue threshold in the Italian audit system. We rely on administrative data on the universe of Sector Studies declarations filed by small businesses and the self-employed over 2007-2016. We readapt the theory on non-linear budget set models to the context of firm revenue declaration. We uncover substantial bunching at the thresholds in data for 2007-2010. Consistent with the model intuition, proxies for the ease and convenience of revenue manipulation across provinces and sectors correlate with our estimates. We then implement reduced-form and structural approaches to estimate the model primitives and study whether the disclosure of audit rules can be revenue enhancing.