Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden

This paper uses administrative data to analyze a large employer-borne payroll tax rate cut for young workers in Sweden. We find no effect on-net-of-tax wages of young treated workers relative to slightly older untreated workers, and a 2-3 percentage point increase in youth employment. Firms employing many young workers receive a larger tax windfall and expand right after the reform: employment, capital, sales, and profits increase. These effects appear stronger in credit-constrained firms. Youth-intensive firms also increase the wages of all their workers collectively, young as well as old, consistent with rent sharing of the tax windfall.