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Does it pay to work?

  • Jagadeesh Gokhale
  • Laurence J. Kotlikoff
  • Alexi Sluchynsky

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.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0206.

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Date of creation: 2002
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Handle: RePEc:fip:fedcwp:0206
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  1. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1994. "Precautionary Saving and Social Insurance," NBER Working Papers 4884, National Bureau of Economic Research, Inc.
  2. Don Fullerton & Diane Lim Rogers, 1994. "Distributional Effects on a Lifetime Basis," NBER Working Papers 4862, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Michael D. Hurd & John B. Shoven, 1983. "The Distributional Impact of Social Security," NBER Working Papers 1155, National Bureau of Economic Research, Inc.
  6. David Bradford, 1995. "The Distributional Analysis of Tax Policy," Books, American Enterprise Institute, number 52866, 4.
  7. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1987. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
  8. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
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