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Estimating Intensive and Extensive Tax Responsiveness Do Older Workers Respond to Income Taxes?

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  • Abby Alpert
  • David Powell

Abstract

This paper studies the impact of income taxes on intensive and extensive labor supply decisions for older workers. The literature provides little evidence about the responsiveness of the older population to tax incentives, though the tax code is a potentially important mechanism for affecting retirement behavior. We estimate the intensive and extensive margins jointly with a new approach accounting for selection into labor force participation. On the extensive margin, we find substantial effects of income taxes on labor force participation and retirement decisions, estimating participation elasticities with respect to after-tax labor income of 0.76 for women and 0.55 for men. About half of the magnitude of these labor force participation elasticities are associated with tax-driven reductions in retirement. We find statistically insignificant compensated elasticities on the intensive margin. We simulate the effects on labor supply of two possible age-targeted tax reforms. We find that eliminating the employee portion of the payroll tax at age 65 would decrease the percentage of workers exiting the labor force by 6-7%. An EITC expansion which extends the tax credit to older ages (irrespective of their number of dependents) would decrease the probability that workers exit the labor force by 3 percentage points for men and by 6 percentage points for women, reductions of 11% and 23% from baseline rates.

Suggested Citation

  • Abby Alpert & David Powell, 2014. "Estimating Intensive and Extensive Tax Responsiveness Do Older Workers Respond to Income Taxes?," Working Papers WR-987-1, RAND Corporation.
  • Handle: RePEc:ran:wpaper:wr-987-1
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    References listed on IDEAS

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    Cited by:

    1. Lundberg, Jacob & Norell, John, 2018. "Taxes, benefits and labour force participation: A survey of the quasi-experimental literature," Ratio Working Papers 313, The Ratio Institute.

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    More about this item

    Keywords

    retirement; income taxes; selection models;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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