Does Taxing Business Owners Affect Employees? Evidence from a Change in the Top Marginal Tax Rate

77 Pages Posted: 30 Jun 2019 Last revised: 11 Mar 2020

See all articles by Max Risch

Max Risch

University of Michigan at Ann Arbor

Date Written: June 28, 2019

Abstract

Debates about the taxation of business owners often center around the distributional impacts of these taxes and the degree to which they affect workers. The majority of business income in the U.S. is earned by pass-through businesses and taxed subject to the personal income tax system, yet the existence and magnitude of spillovers from personal income taxation to firm behavior has been difficult to estimate. This paper uses a new linked owner-firm-employee dataset created from administrative tax records to analyze how a recent increase in the top marginal tax rate faced by pass-through business owners affected the compensation of their employees. I use panel difference-in-differences methods to compare the earnings of employees in similar firms but whose owners were differentially exposed to a recent tax increase and estimate that approximately 15 to 18 cents per dollar of new tax liability was passed through to employee earnings. This resulted from lower earnings growth among employees attached to their firms, not compositional changes in employment. These results show behavioral responses to the business income taxation embedded in the personal income tax system and imply that the incidence of the personal income tax was not fully borne by those directly subject to the tax change.

Keywords: Tax Incidence, Business Tax, Personal Income Tax, Compensation

JEL Classification: H22, H25, J30

Suggested Citation

Risch, Max, Does Taxing Business Owners Affect Employees? Evidence from a Change in the Top Marginal Tax Rate (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=3411847 or http://dx.doi.org/10.2139/ssrn.3411847

Max Risch (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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