Earnings Responses to Earnings Responses to Increases in Payroll Increases in Payroll
TaxesTaxes
by Liebman and Saezby Liebman and Saez
Discussion by Leora Friedberg,Discussion by Leora Friedberg,University of Virginia and NBERUniversity of Virginia and NBER
Conference on Conference on ““Pathways to a Secure Retirement”Pathways to a Secure Retirement”
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. www.whitehouse.gov – not really1. www.whitehouse.gov – not really
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
““He [Bush] will listen to any good idea that He [Bush] will listen to any good idea that does not include raising payroll taxes.”does not include raising payroll taxes.”
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
3. 3. www.cato.orgwww.cato.org – no – no
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
3. 3. www.cato.orgwww.cato.org – no – no
same as 5. same as 5. www.socialsecurity.orgwww.socialsecurity.org
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
3, 5. 3, 5. www.cato.orgwww.cato.org – no – no
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
3, 5. 3, 5. www.cato.orgwww.cato.org – no – no
7. 7. www.heritage.orgwww.heritage.org – no – no
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. 2. www.brookings.eduwww.brookings.edu – yes – yes
3, 5. 3, 5. www.cato.orgwww.cato.org – no – no
7. 7. www.heritage.orgwww.heritage.org – no – no
9. 9. www.ksg.harvard.edu/jeffreyliebmanwww.ksg.harvard.edu/jeffreyliebman – yes – yes
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform Google on “Social Security reform proposals”proposals”1. 1. www.whitehouse.govwww.whitehouse.gov – not really – not really
2. www.brookings.edu – yes2. www.brookings.edu – yes
3, 5. www.cato.org – no3, 5. www.cato.org – no
7. www.heritage.org – no7. www.heritage.org – no
9. www.ksg.harvard.edu/jeffreyliebman – yes9. www.ksg.harvard.edu/jeffreyliebman – yes
same as 11. voxbaby.blogspot.comsame as 11. voxbaby.blogspot.com
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform proposals”Google on “Social Security reform proposals”1. www.whitehouse.gov – not really1. www.whitehouse.gov – not really
2. www.brookings.edu – yes2. www.brookings.edu – yes
3, 5. www.cato.org – no3, 5. www.cato.org – no
7. www.heritage.org – no7. www.heritage.org – no
9, 11. www.ksg.harvard.edu/jeffreyliebman – yes9, 11. www.ksg.harvard.edu/jeffreyliebman – yes
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform proposals”Google on “Social Security reform proposals”1. www.whitehouse.gov – not really1. www.whitehouse.gov – not really
2. www.brookings.edu – yes2. www.brookings.edu – yes
3, 5. www.cato.org – no3, 5. www.cato.org – no
7. www.heritage.org – no7. www.heritage.org – no
9, 11. www.ksg.harvard.edu/jeffreyliebman – yes9, 11. www.ksg.harvard.edu/jeffreyliebman – yes
15. www.ncpa.org – vague, probably not15. www.ncpa.org – vague, probably not
Raising the payroll tax limitRaising the payroll tax limit
Google on “Social Security reform proposals”Google on “Social Security reform proposals”1. www.whitehouse.gov – not really1. www.whitehouse.gov – not really
2. www.brookings.edu – yes2. www.brookings.edu – yes
3, 5. www.cato.org – no3, 5. www.cato.org – no
7. www.heritage.org – no7. www.heritage.org – no
9, 11. www.ksg.harvard.edu/jeffreyliebman – yes9, 11. www.ksg.harvard.edu/jeffreyliebman – yes
15. www.ncpa.org – vague, probably not15. www.ncpa.org – vague, probably not
21. www.house.gov/defazio – yes21. www.house.gov/defazio – yes
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply alters return to earning wagesalters return to earning wages
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply alters return to earning wagesalters return to earning wages
pre-tax earnings
post-tax earnings
slope 1-inc-payroll
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply alters return to earning wagesalters return to earning wages
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply empirical test #1empirical test #1
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply empirical test #1empirical test #1
resultsresults
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply empirical test #1empirical test #1
results: people don’t avoid “reverse kink”results: people don’t avoid “reverse kink”
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, either people don’t avoid “reverse kink”, either
because … because …
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, either because people don’t avoid “reverse kink”, either because
… …
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
X
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, either because … people don’t avoid “reverse kink”, either because …
labor supply is very inelasticlabor supply is very inelastic
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
X
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, or else people don’t avoid “reverse kink”, or else
because … because …
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, or else people don’t avoid “reverse kink”, or else
because … because …
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
?X
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplypeople don’t avoid “reverse kink”, or else because … people don’t avoid “reverse kink”, or else because …
they’re confusedthey’re confused
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
?X
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof raising payroll tax limitof raising payroll tax limit
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof raising payroll tax limitof raising payroll tax limit
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc- 0.124
1-inc
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof eliminating payroll tax limitof eliminating payroll tax limit
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof eliminating payroll tax limitof eliminating payroll tax limit
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc- 0.124
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply
pre-tax earnings
post-tax earnings
slope 1-inc- 0.124
1-inc
$90,000
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supply(more accurate)(more accurate)
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-inc2
- 0.124
1-inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-inc2
- 0.124
1-inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-’inc2
- 0.124
1-’inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
empirical test #2’empirical test #2’
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-’inc2
- 0.124
1-’inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-’inc2
- 0.124
1-’inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-’’inc2
- 0.124
1-’’inc2
Raising the payroll tax limitRaising the payroll tax limit
Impact on labor supplyImpact on labor supplyof changing income tax rates on high earnersof changing income tax rates on high earners
empirical test #2’’empirical test #2’’
pre-tax earnings
post-tax earnings
$90,000
slope 1-inc1
-
0.124
1-’’inc2
- 0.124
1-’’inc2
Raising the payroll tax limitRaising the payroll tax limit
SummarySummary#1 little evidence that people avoid “reverse #1 little evidence that people avoid “reverse
kink”kink”
#2’ little evidence that labor supply increased #2’ little evidence that labor supply increased following TRA 86following TRA 86
#2’’ little evidence that labor supply decreased #2’’ little evidence that labor supply decreased following OBRA 93following OBRA 93
Raising the payroll tax limitRaising the payroll tax limit
SummarySummary#1 little evidence that people avoid “reverse #1 little evidence that people avoid “reverse
kink”kink”
#2’ little evidence that labor supply increased #2’ little evidence that labor supply increased following TRA 86following TRA 86
#2’’ little evidence that labor supply decreased #2’’ little evidence that labor supply decreased following OBRA 93following OBRA 93
Raising the payroll tax limitRaising the payroll tax limit
SummarySummary#1 little evidence that people avoid “reverse #1 little evidence that people avoid “reverse
kink”kink”
#2’ little evidence that labor supply increased #2’ little evidence that labor supply increased following TRA 86following TRA 86
#2’’ little evidence that labor supply decreased #2’’ little evidence that labor supply decreased following OBRA 93following OBRA 93
Raising the payroll tax limitRaising the payroll tax limit
Policy implicationPolicy implicationcould raise payroll tax limit could raise payroll tax limit
without adverse effects on labor supply, tax without adverse effects on labor supply, tax revenuerevenue
CaveatsCaveatsdata: not very recentdata: not very recent
underlying assumptions: what if labor demand is underlying assumptions: what if labor demand is not perfectly elastic?not perfectly elastic?
policy implication: what if raising payroll tax policy implication: what if raising payroll tax limit reduces confusion?limit reduces confusion?
Raising the payroll tax limitRaising the payroll tax limit
Policy implicationPolicy implicationcould raise payroll tax limit could raise payroll tax limit
without adverse effects on labor supply, tax without adverse effects on labor supply, tax revenuerevenue
CaveatsCaveatsdata: not very recentdata: not very recent
underlying assumptions: what if labor demand is underlying assumptions: what if labor demand is not perfectly elastic?not perfectly elastic?
policy implication: what if raising payroll tax policy implication: what if raising payroll tax limit reduces confusion?limit reduces confusion?
Raising the payroll tax limitRaising the payroll tax limit
Policy implicationPolicy implicationcould raise payroll tax limit could raise payroll tax limit
without adverse effects on labor supply, tax without adverse effects on labor supply, tax revenuerevenue
CaveatsCaveatsdata: not very recentdata: not very recent
underlying assumptions: what if labor demand is underlying assumptions: what if labor demand is not perfectly elastic?not perfectly elastic?
policy implication: what if raising payroll tax policy implication: what if raising payroll tax limit reduces confusion?limit reduces confusion?
Raising the payroll tax limitRaising the payroll tax limit
Policy implicationPolicy implicationcould raise payroll tax limit could raise payroll tax limit
without adverse effects on labor supply, tax without adverse effects on labor supply, tax revenuerevenue
CaveatsCaveatsdata: not very recentdata: not very recent
underlying assumptions: what if labor demand is underlying assumptions: what if labor demand is not perfectly elastic?not perfectly elastic?
policy implication: what if raising payroll tax policy implication: what if raising payroll tax limit reduces confusion?limit reduces confusion?
Raising the payroll tax limitRaising the payroll tax limit
Policy implicationPolicy implicationcould raise payroll tax limit could raise payroll tax limit
without adverse effects on labor supply, tax without adverse effects on labor supply, tax revenuerevenue
CaveatsCaveatsdata: not very recentdata: not very recent
underlying assumptions: what if labor demand is underlying assumptions: what if labor demand is not perfectly elastic?not perfectly elastic?
policy implication: what if raising payroll tax policy implication: what if raising payroll tax limit reduces confusion?limit reduces confusion?
