Haotian Deng (Ghent University)
Gert Bijnens
This paper studies payroll tax incidence at firm entry, a setting rarely examined in the literature. We exploit a 2016 Belgian reform that permanently exempted new employers from payroll taxes for their first employee, sharply reducing hiring costs and encouraging entry of lower-productivity firms. Using administrative data and a cohort-based difference-in-differences design, we find that the reform reduced payroll taxes while raising both wage rates and working time. To interpret these results, we develop a unified model linking firm entry, firm productivity, and tax incidence. We then propose a theory-guided trimming method to address compositional changes of firm entry. The yielded estimates remain close to the baseline results, suggesting productivity differences matter little for entry incidence. Employees capture about one-third of the payroll tax relief on a per-FTE basis, which suggests the importance of wage bargaining at firm entry.