Payroll Tax Incidence on Small Businesses: An Empirical Investigation of Shifting the Payroll Tax Burden

Authors

  • Ted D. Englebrecht Louisiana Tech University
  • Laurie J. Henry Old Dominion University
  • Govind S. Iyer Arizona State University

Abstract

The payroll tax earmarked for  the financing  of social security  benefits has been the leading growth  tax on small businesses over the past few decades. Small businesses pay more  in payroll  tax than in any other form of tax. Indeed, these taxes are levied on small businesses irrespective of their profits. The statutory incidence of one-half of the payroll tax being paid by the employer and one-half by the employee may be very different from the actual incidence of the tax due to employer shifting mechanisms.

While there has been considerable conjecture about the shifting of the payroll tax burden, there has been very little research that has explicitly studied the shifting mechanisms undertaken by small businesses. In this study, responses were elicited from a sample of 182 small business owners in the Hampton Roads area of Virginia to ascertain whether the payroll tax is shifted by passing ii on to the consumer by way of increased prices, passing it on to the employee by way of reduced wages, or absorbed by the business reducing profits. This inquiry found that,  in general, small businesses are not likely to shift the employer 's share of the tax burden to employees. Specifically, the most popular alternative in dealing with payroll tax increases was lo increase prices for their product/service.

References

Break, G. F. (1981). The OAS! program. Social Security Financing. Massachusetts: MIT Press.

Brittain, J. A. (1971, March). The incidence of Social Security payroll taxes. American Economic Review, 61(2), 1 10-25.

The Payroll Tax for Social Security. (1972). Washington, DC: The Brookings Institution. Gruber, J. (1997, July). The incidence of payroll taxation: Evidence from Chile. Journal of Labor Economics, 15(3), S72-Sl01.

Hamilton, S. F. (I999). Tax incidence under oligopoly: A comparison of policy approaches. Journal of Public Economics, 71(2), 233-45.

Internal Revenue Service. (2001}. Publication 15. Circular E, Employer's Tax Guide. Washington, DC: Department of the Treasury.

lsakowitz, M. (1995). Testimony of Mark Isakowitz, Director Federal Government Relations House, before the House Committee on Small Business, Subcommittee on Taxation and Finance, June 28, 1995. Federal Document Clearing House. Y4.sm l:l 04-35.

These options are also discussed by Mark !wry in his testimony on a hearing on "Payroll tax burden on small business" before the House Comm ittee on Small Business, Subcommittee on Taxation and Finance, June 28, 1995.

Iwry, M. (1995). Testimony of Mark !wry, Benefits Tax Counsel Department of the Treasury, before the House Committee on Small Business, Subcommittee on Taxation and Finance, June 28, I 995. Federal Document Clearing House. Y4.sm l :I04-35. Footnote 3

Kesselman, J. R. (1996, June). Payroll taxes in the finance of Social Security. Canadian Public Pol icy, 22(2), I 62-79.

KR Information disc. (1999, August). Corporate America. (Cities of Norfolk, Virginia Beach, Chesapeake, Portsmouth, Newport News and Hampton, Virginia) Knight-Ridder Information Inc.

Pechman, J. A., Aaron, H. J. & Taussig, M. K. (I968). Social Security: Perspectives for Reform. Washington, DC: The Brookings Institution.

Wang, L. F. S. (1993). Sector-specific unemployment and corporate income tax incidence: A geometric exposition. American Economist, 37(1),64-67.

Downloads

Published

2001-06-23

Issue

Section

Articles

How to Cite

Payroll Tax Incidence on Small Businesses: An Empirical Investigation of Shifting the Payroll Tax Burden. (2001). Journal of Small Business Strategy (archive Only), 12(2), 82-98. https://libjournals.mtsu.edu/index.php/jsbs/article/view/481