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

Vol. 12 No. 2 (2001)

Section

Articles

License

The Journal of Small Business Strategy (the “Publisher”) and the Author(s) agree as follows:
 
1.Author(s) hereby grant to Publisher all right, title, and interest in and to the Work, including copyright to all means of expression by any method now known or hereafter developed, including electronic format. If Publisher does not publish the Work within two (2) years of the Effective Date, copyright shall revert back to the Author. Publisher agrees to always credit Author(s) as the author(s) of the Work.
 
2.Publisher hereby grants Author a royalty-free, limited license for the following purposes, provided the Work is always identified as having first been published by Publisher.
    •The right to make and distribute copies of all or part of the Work for use in teaching;
    •The right to use all or part of the material contained in the Work in a book by the Author(s), or in a collection of the Author(s)’s work;
    •The right to use and distribute the Work internally at the Author(s)’s place of employment, and for promotion and any other non-commercial purposes;
    •The right to use figures and tables from the Work for any purpose;
    •The right to make presentations of material from the Work;
    •The right to use and distribute the Work on the Author(s)’s Web site and on the Author(s)’s university’s institute repository;
Such license shall be effective when the Work is first published in the Journal of Small Business Strategy.
 
3.The Author(s) represents and warrants that the Work: (a) is the Author(s)’s original work and that Author(s) has full power to enter into this agreement; (b) does not infringe the copyright or property right of another; (c) contains no materials which is obscene, libelous, defamatory or violates another’s civil right, right of privacy, or is otherwise unlawful; and (d) has not been previously published, in whole or in part. Author(s) shall indemnify and hold Publisher harmless against loss or expenses arising from breach of any such warranties.

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