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Does it pay to work?

Author

Listed:
  • Jagadeesh Gokhale
  • Laurence J. Kotlikoff
  • Alexi Sluchynsky

Abstract

Does it pay to work? This is a tough question because of the complexity of the tax code and the plethora of dynamic linkages involved: 1) Earning more today typically alters current saving and, therefore, future capital income taxes. 2) Earning more today generally alters future consumption and, therefore, future consumption taxes. 3) Changing future levels of income and assets changes the eligibility for and levels received of income- and asset-tested transfer benefits. 4) The most important transfer program, Social Security, explicitly links future transfer payments to current earnings. 5) Income taxes in retirement depend on past earnings because Social Security benefits, which are subject to federal income taxation, depend on past earnings. This paper attempts to capture the net effective tax on work by using an intertemporal model capable of carefully determining tax and transfer payments at each stage of the life cycle.

Suggested Citation

  • Jagadeesh Gokhale & Laurence J. Kotlikoff & Alexi Sluchynsky, 2002. "Does it pay to work?," Working Paper 0206, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0206
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    References listed on IDEAS

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    1. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    2. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    3. Jagadeesh Gokhale & Laurence J. Kotlikoff, 2002. "Social Security's Treatment of Postwar Americans. How Bad Can It Get?," NBER Chapters,in: The Distributional Aspects of Social Security and Social Security Reform, pages 207-262 National Bureau of Economic Research, Inc.
    4. Don Fullerton & Diane Lim Rogers, 1994. "Distributional Effects on a Lifetime Basis," NBER Working Papers 4862, National Bureau of Economic Research, Inc.
    5. Steven Caldwell & Melissa Favreault & Alla Gantman & Jagadeesh Gokhale & Thomas Johnson & Laurence J. Kotlikoff, 1999. "Social Security's Treatment of Postwar Americans," NBER Chapters,in: Tax Policy and the Economy, Volume 13, pages 109-148 National Bureau of Economic Research, Inc.
    6. Boskin, Michael J. & Kotlikoff, Lawrence J. & Puffert, Douglas J. & Shoven, John B., 1986. "Social Security: A Financial Appraisal Across and Within Generations," CEPR Publications 244432, Stanford University, Center for Economic Policy Research.
    7. Michael D. Hurd & John B. Shoven, 1985. "The Distributional Impact of Social Security," NBER Chapters,in: Pensions, Labor, and Individual Choice, pages 193-222 National Bureau of Economic Research, Inc.
    8. David Bradford, 1995. "The Distributional Analysis of Tax Policy," Books, American Enterprise Institute, number 52866, June.
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    Citations

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    Cited by:

    1. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    2. Laurence J. Kotlikoff & David Rapson, 2007. "Does It Pay, at the Margin, to Work and Save? Measuring Effective Marginal Taxes on Americans' Labor Supply and Saving," NBER Chapters,in: Tax Policy and the Economy, Volume 21, pages 83-144 National Bureau of Economic Research, Inc.
    3. Laurence J. Kotlikoff, 2007. "Is the U.S. Bankrupt?," Boston University - Department of Economics - Working Papers Series WP2007-015, Boston University - Department of Economics.
    4. Palacios, Robert & Sluchynsky, Oleksiy, 2006. "Social pensions Part I : their role in the overall pension system," Social Protection and Labor Policy and Technical Notes 36237, The World Bank.
    5. Matthew S. Rutledge & John E. Lindner, 2016. "Do Late-Career Wages Boost Social Security More For Women Than Men?," Working Papers, Center for Retirement Research at Boston College wp2016-13, Center for Retirement Research.
    6. Barbara A Butrica & Karen Elizabeth Smith & C. Eugene Steuerle, 2006. "Working for a Good Retirement," Working Papers, Center for Retirement Research at Boston College wp2006-8, Center for Retirement Research, revised May 2006.
    7. Simon Gilchrist & Fabio M. Natalucci & Egon Zakrajsek, 2007. "Investment and the Cost of Capital: New Evidence from the Corporate Bond Market," Boston University - Department of Economics - Working Papers Series WP2007-027, Boston University - Department of Economics.
    8. Laurence J. Kotlikoff, 2006. "Is the United States bankrupt?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 235-250.
    9. Alan J. Auerbach & Laurence J. Kotlikoff & Darryl Koehler & Manni Yu, 2017. "Is Uncle Sam Inducing the Elderly to Retire?," Tax Policy and the Economy, University of Chicago Press, vol. 31(1), pages 1-42.
    10. Louis Kaplow, 2007. "Optimal income transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 295-325, June.
    11. Harry ter Rele, 2005. "Measuring lifetime redistribution in Dutch collective arrangements," CPB Document 79, CPB Netherlands Bureau for Economic Policy Analysis.
    12. Laurence J. Kotlikoff & David Rapson, 2005. "Comparing Average and Marginal Tax Rates Under the FairTax and the Current System of Federal Taxation," NBER Working Papers 11831, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Income tax ; Social security;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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