earnings responses to increases in payroll taxes by liebman and saez discussion by leora friedberg,...

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Earnings Responses Earnings Responses to Increases in to Increases in Payroll Taxes Payroll Taxes by Liebman and Saez by Liebman and Saez Discussion by Leora Friedberg, Discussion by Leora Friedberg, University of Virginia and NBER University of Virginia and NBER Conference on Conference on Pathways to a Secure Retirement” Pathways to a Secure Retirement”

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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?