Payroll tax incidence when the tax varies by jurisdiction: The case of the U.S. unemployment insurance tax

Standard treatment of payroll tax incidence suggests that labor, both because of inelastic supply and because workers value the benefit financed by the tax, bears most of the tax. This note considers the special case of the U.S. unemployment insurance tax, which is a payroll tax that varies by jurisdiction (states). The model set forth in this paper allows for differing degrees of both labor mobility and substitutability between types of labor and capital. Contrary to the standard treatment, this paper predicts that some types of labor will avoid this particular type of payroll tax completely. I thank Daniel Hamermesh and seminar participants at the Upjohn Institute for Employment Research and at Oakland University for helpful comments on an earlier draft. I also gratefully acknowledge sabbatical support provided by Oakland University during the initial conceptualization of the ideas presented in this paper.