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Tax Elasticity of Labor Earnings for Older Individuals

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  • Abby Alpert

    (RAND)

  • David Powell

    (RAND)

Abstract

This paper studies the impact of income and payroll taxes on intensive and extensive labor supply decisions for workers ages 55-74 using the Health and Retirement Study. The literature provides little guidance about the responsiveness of this population to tax incentives, though the tax code is potentially an important mechanism that can alter retirement incentives. We model labor force participation decisions and labor earnings as functions of taxes, and we use the intensive margin to inform estimation of the extensive margin equation. Our method accounts for selection into labor force participation with a plausibly exogenous shock to employment. We use the results of our intensive labor supply estimation to predict the after-tax labor earnings of every person in our sample, including those that do not work. This method allows us to generate consistent estimates of the impact of taxes on employment and retirement. We find large compensated elasticities on the intensive margin. These results are imprecise, but they are statistically significant for women. On the extensive margin, we find significant effects on labor force participation and, for men, retirement decisions. Our estimates suggest that an age-targeted tax reform that eliminates payroll taxes for older workers would decrease the percentage of workers dropping out of the labor force by 1 percentage point, a 4% decrease.

Suggested Citation

  • Abby Alpert & David Powell, 2012. "Tax Elasticity of Labor Earnings for Older Individuals," Working Papers wp272, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp272
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    References listed on IDEAS

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    Cited by:

    1. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers 38, Directorate General Taxation and Customs Union, European Commission.
    2. Werner Eichhorst & Tito Boeri & An De Coen & Vincenzo Galasso & Michael Kendzia & Nadia Steiber, 2014. "How to combine the entry of young people in the labour market with the retention of older workers?," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-23, December.
    3. Werner Eichhorst & Tito Boeri & Michela Braga & An de Coen & Galasso Vicenzo & Maarten Gerard & Michael J. Kendzia & Christine Mayrhuber & Jakob Louis Pedersen & Ricarda Schmidl & Nadia Steiber, 2013. "Combining the Entry of Young People in the Labour Market with the Retention of Older Workers," WIFO Studies, WIFO, number 46988, April.
    4. Christine Mayrhuber & Silvia Rocha-Akis, 2013. "Anreizsysteme zur Weiterbeschäftigung älterer Arbeitnehmerinnen und Arbeitnehmer," WIFO Studies, WIFO, number 46905, April.
    5. Ulrike Famira-Mühlberger & Ulrike Huemer & Christine Mayrhuber, 2015. "Die Beschäftigungsquote Älterer im europäischen Vergleich," WIFO Studies, WIFO, number 58532, April.
    6. Ulrike Huemer & Julia Bock-Schappelwein & Ulrike Famira-Mühlberger & Hedwig Lutz & Christine Mayrhuber, 2017. "Österreich 2025 – Arbeitszeitverteilung in Österreich. Analyse und Optionen aus Sicht der Arbeitnehmerinnen und Arbeitnehmer," WIFO Monatsberichte (monthly reports), WIFO, vol. 90(11), pages 865-876, November.

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