Does Tax-Benefit Linkage Matter for the Incidence of Payroll Taxes?

Antoine Bozio, Paris School of Economics, EHESS, Thomas Breda, Paris School of Economics, CNRS, Julien Grenet, Paris School of Economics, CNRS, and Arthur Guillouzouic, Aix-Marseille School of Economics, CNRS

We analyze earnings responses to six large payroll tax and income tax reforms in France. Our findings indicate full pass-through to workers when there is a strong and transparent link between contributions and expected benefits. In contrast, employer payroll taxes with no tax-benefit linkage exhibit limited pass-through to workers, while income tax nominally borne by employees show nearly full pass-through. Together with a meta-analysis of the literature, we interpret these results as empirical support for the long-standing hypothesis that tax-benefit linkage matters for the incidence of payroll taxes. In the absence of such linkage, our findings suggest that the individual-level incidence of payroll taxes aligns with their statutory incidence.