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Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test

Author

Listed:
  • Damon Jones

    (University of Chicago)

  • Alexander M. Gelber

    (University of California, Berkeley)

  • Daniel W. Sacks

    (Indiana University)

  • Jae Song

Abstract

We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

Suggested Citation

  • Damon Jones & Alexander M. Gelber & Daniel W. Sacks & Jae Song, 2017. "Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test," Working Papers 2017-034, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2017-034
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    Cited by:

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    2. Aghion, Philippe & Akcigit, Ufuk & Lequien, Matthieu & Stantcheva, Stefanie, 2017. "Tax simplicity and heterogeneous learning," LSE Research Online Documents on Economics 86613, London School of Economics and Political Science, LSE Library.
    3. Philippe Aghion & Maxime Gravoueille & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity or Simplicity of Evasion? Evidence from Self-Employment Taxes in France," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    4. Fitzpatrick, Maria D., 2019. "Pension reform and return-to-work policies," Journal of Pension Economics and Finance, Cambridge University Press, vol. 18(4), pages 500-514, October.
    5. Escobar, Sebastian & Ohlsson, Henry & Selin, Håkan, 2019. "Taxes, frictions and asset shifting: when Swedes disinherited themselves," Working Paper Series 2019:6, IFAU - Institute for Evaluation of Labour Market and Education Policy.
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    More about this item

    Keywords

    social security; elasticity of employment rate; Annual Earnings Test;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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