How Do Tax Increase Policies Affect Employees Employed by Firms of Different Sizes?

Abstract

This study examines how firm size changes the impact of corporate taxation on employee benefits, using the 2014 surtax policy change in Connecticut policy focus. Through a comparative case analysis of two large and two small firms in Connecticut (treatment group) and Pennsylvania (control group), this study analyzes the changes in average non-wage employee benefits before and after the tax rate changes. Financial data from SEC filings (2011–2017) shows that large firms in Connecticut experienced a significantly larger decline in their average employee benefits (−40%) compared to the control group case in Pennsylvania (−9.7%), which a difference of 30.3%. On the other hand, small firms showed a smaller difference (2.6%) in benefit reductions between the control group and treatment group. Employment levels remained relatively stable across both groups, suggesting that benefit adjustments are the main response to surtax policy. These findings suggest that firm size contributes to the effect of taxation on the employee benefits that employees receive, with larger firms showing a greater change in their employees' responses to tax increases.