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Implicit Taxes on Work from Social Security and Medicare

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  • Gopi Shah Goda
  • John B. Shoven
  • Sita Nataraj Slavov

Abstract

Implicit taxes are present in many government programs and can create substantial work disincentives. The implicit tax created by Social Security is the payroll tax used to fund the retirement portion of Social Security minus the present value of the incremental retirement benefits associated with the earnings. While the payroll tax is always 10.6%, the implicit tax varies over a worker's career because additional earnings translate nonlinearly into additional retirement benefits. We show that workers at the start of their careers experience lower implicit tax rates, as the increase in benefits from additional work is relatively large. However, workers who are closer to retirement earn little or no additional benefit from additional work. The main implicit tax in Medicare lies in the Medicare as Secondary Payer (MSP) policy, which requires Medicare to be a secondary payer for Medicare-eligible workers whose employers offer a health plan and have 20 or more employees. Thus, affected workers effectively forgo the Medicare benefits that they would have received if they had not been working. We investigate a combination of policies that can reduce average implicit tax rates on older workers by as much as 45%.

Suggested Citation

  • Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2011. "Implicit Taxes on Work from Social Security and Medicare," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 69-88.
  • Handle: RePEc:ucp:tpolec:doi:10.1086/658381
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    References listed on IDEAS

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    1. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2009. "Removing the Disincentives in Social Security for Long Careers," NBER Chapters,in: Social Security Policy in a Changing Environment, pages 21-38 National Bureau of Economic Research, Inc.
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    3. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2007. "A Tax on Work for the Elderly: Medicare as a Secondary Payer," NBER Working Papers 13383, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Monisankar Bishnu & Nick L. Guo & Cagri S Kumru, 2017. "Social Security: Progressive Benefits but Regressive Outcome?," ANU Working Papers in Economics and Econometrics 2017-656, Australian National University, College of Business and Economics, School of Economics.
    2. John B. Shoven & Sita Nataraj Slavov, 2012. "The Decision to Delay Social Security Benefits: Theory and Evidence," NBER Working Papers 17866, National Bureau of Economic Research, Inc.

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