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My name is Kristoffer Berg,
and I'm a lecturer at
Trinity College,
University of Cambridge.
Now we're going to have
the fourth talk on
business taxation.
The topic today is going
to be taxing firm inputs.
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The background here is that
firms can use different
inputs in their production
and often these inputs are
also taxed by the tax system.
The question is what happens
when these inputs are
taxed, either when the firm uses
these inputs or in other ways.
So some examples of taxes on
firm inputs is the
tax on labour income.
So firms use workers so
a tax on labour income is a
tax on one of their inputs.
There are payroll taxes,
capital income taxes,
dividend taxes,
capital gains taxes,
commercial property taxes and
there are many other examples.
The inputs that we have
considered here are
the labour, capital
and land or property,
but of course, firms
have many other inputs
that may also be taxed
in different ways.
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Imagine that the corporate
income tax is a tax
on pure profits, as we
discussed in the previous talk.
Now, what happens if
a firm has to pay
a payroll tax when
it hires workers?
Lots of countries
have payroll taxes
where firms have to pay
some tax on the income
or the payroll that
they have in the firm.
After tax profits, in this
case, takes this form:
There's one minus tau, that's
the corporate income tax,
times their pure profits, so
that's revenue minus costs.
But then there is
this additional term
minus t times w times l,
where t is the payroll tax,
so there's an extra tax
on their labour inputs.
What happens to the firm's
choice in this case?
Now the return to hiring
one more worker becomes
the t times w plus one minus tau
times w divided
by one minus tau.
Remember that t is
the payroll tax,
and tau is the
corporate income tax.
If t is zero, this
is equal to w.
But when t is positive when
there is a payroll tax in place,
this becomes larger than w.
An implication of this
being larger than w is
that the return to hiring
an additional worker for
the firm has to be higher
than the economic cost of
hiring another worker such that
there's a distortion to how
many workers the firm hires
and they'll hire fewer
workers compared to
in the case where there
was no payroll tax.
This means that the
return for hiring
