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The optimal earnings test and retirement behavior

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  • Masayuki Okada

    (New York University)

Abstract

This paper quantitatively derives the welfare-improving earnings test within an optimal income tax framework. I construct a life cycle model of labor supply and savings to compute social welfare. The preference parameters are estimated by the method of simulated moments using Japanese data. I find that social welfare under the current earnings test with large changes of marginal tax rates at thresholds is substantially lower than social welfare under the earnings test with a linear tax rate. In addition, an earnings test with negative marginal tax rates will increase social welfare more than a system without negative marginal tax rates.

Suggested Citation

  • Masayuki Okada, 2023. "The optimal earnings test and retirement behavior," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(4), pages 1036-1068, August.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:4:d:10.1007_s10797-022-09734-0
    DOI: 10.1007/s10797-022-09734-0
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    More about this item

    Keywords

    Earnings test; Retirement; Optimal income tax; Negative marginal tax rate;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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