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Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms

Author

Listed:
  • H. W. Hoynes
  • R. Moffitt

Abstract

The Social Security Disability Insurance (SSDI) Program has long been criticized by economists for its apparent work disincentives stemming from the imposition of 100 percent tax rates on earnings. However, the program has been modified in recent years to allow recipients to keep some of their earnings for fixed periods of time. Moreover, additional proposals have been made for lowering the tax rate further and for providing various additional financial work incentives. We use the basic labor supply model to show the expected effect of these reforms on work effort. In addition, we provide a numerical simulation that shows the magnitude of the monetary incentives provided by the reforms for different categories of individuals. We find that the proposed reforms have ambiguous effects on work effort and could, contrary to perceived wisdom, possibly reduce work effort and increase the number of SSDI recipients. However, the simulations show that reforms based on earnings subsidies for private employers are more likely to increase work effort and to lower the caseload.

Suggested Citation

  • H. W. Hoynes & R. Moffitt, "undated". "Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms," Institute for Research on Poverty Discussion Papers 1139-97, University of Wisconsin Institute for Research on Poverty.
  • Handle: RePEc:wop:wispod:1139-97
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    File URL: http://www.irp.wisc.edu/publications/dps/pdfs/dp113997.pdf
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    References listed on IDEAS

    as
    1. Moffitt, Robert, 1992. "Incentive Effects of the U.S. Welfare System: A Review," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 1-61, March.
    2. N. Eissa & H. W. Hoynes, "undated". "The Earned Income Tax Credit and the Labor Supply of Married Couples," Institute for Research on Poverty Discussion Papers 1194-99, University of Wisconsin Institute for Research on Poverty.
    3. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
    4. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, vol. 81(5), pages 1419-1426, December.
    5. Jonathan S. Leonard, 1985. "Labor Supply Incentives and Disincentives for the Disabled," NBER Working Papers 1744, National Bureau of Economic Research, Inc.
    6. Parsons, Donald O, 1980. "Racial Trends in Male Labor Force Participation," American Economic Review, American Economic Association, vol. 70(5), pages 911-920, December.
    7. Bound, John, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Reply," American Economic Review, American Economic Association, vol. 81(5), pages 1427-1434, December.
    8. Parsons, Donald O, 1984. "Disability Insurance and Male Labor Force Participation: A Response," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 542-549, June.
    9. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-134, February.
    10. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, vol. 79(3), pages 482-503, June.
    11. Haveman, Robert H & Wolfe, Barbara L, 1984. "The Decline in Male Labor Force Participation: Comment," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 532-541, June.
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    Citations

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    Cited by:

    1. Alexander Gelber & Timothy J. Moore & Alexander Strand, 2017. "The Effect of Disability Insurance Payments on Beneficiaries' Earnings," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 229-261, August.
    2. repec:eee:labeco:v:47:y:2017:i:c:p:202-215 is not listed on IDEAS
    3. Koning, Pierre & van Sonsbeek, Jan-Maarten, 2017. "Making disability work? The effects of financial incentives on partially disabled workers," Labour Economics, Elsevier, vol. 47(C), pages 202-215.
    4. Sergi Jiménez-Martín & Arnau Juanmarti Mestres & Judit Vall-Castello, 2017. "Hiring subsidies for people with disabilities: Do they work?," Working Papers 967, Barcelona Graduate School of Economics.
    5. Philippe Ruh & Stefan Staubli, 2018. "Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design," NBER Working Papers 24830, National Bureau of Economic Research, Inc.
    6. Andreas Ravndal Kostol & Magne Mogstad, 2014. "How Financial Incentives Induce Disability Insurance Recipients to Return to Work," American Economic Review, American Economic Association, vol. 104(2), pages 624-655, February.
    7. Hamish Low & Luigi Pistaferri, 2015. "Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off," American Economic Review, American Economic Association, vol. 105(10), pages 2986-3029, October.
    8. repec:eee:labchp:v:3:y:1999:i:pc:p:3417-3528 is not listed on IDEAS
    9. Nicole Maestas & Kathleen J. Mullen & Gema Zamarro, 2012. "Induced Entry into the Social Security Disability Program: Using Past SGA Changes as a Natural Experiment," Working Papers wp262, University of Michigan, Michigan Retirement Research Center.
    10. David T. Ellwood, 2001. "The Sputtering Labor Force of the 21st Century. Can Social Policy Help?," NBER Working Papers 8321, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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