Earnings Responses to
Increases in Payroll Taxes
by Liebman and Saez
Discussion by Leora Friedberg,
University of Virginia and NBER
Conference on
“Pathways to a Secure Retirement”
Raising the payroll tax limit

Google on “Social Security reform proposals”
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
“He [Bush] will listen to any good idea that does not
include raising payroll taxes.”
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
3. www.cato.org – no
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
3. www.cato.org – no
same as 5. www.socialsecurity.org
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
3, 5. www.cato.org – no
Raising the payroll tax limit

Google on “Social Security reform proposals”
1.
2.
3,
7.
www.whitehouse.gov – not really
www.brookings.edu – yes
5. www.cato.org – no
www.heritage.org – no
Raising the payroll tax limit

Google on “Social Security reform proposals”
1.
2.
3,
7.
9.
www.whitehouse.gov – not really
www.brookings.edu – yes
5. www.cato.org – no
www.heritage.org – no
www.ksg.harvard.edu/jeffreyliebman – yes
Raising the payroll tax limit

Google on “Social Security reform proposals”
1.
2.
3,
7.
9.
www.whitehouse.gov – not really
www.brookings.edu – yes
5. www.cato.org – no
www.heritage.org – no
www.ksg.harvard.edu/jeffreyliebman – yes
same as 11. voxbaby.blogspot.com
Raising the payroll tax limit

Google on “Social Security reform proposals”
1.
2.
3,
7.
9,
www.whitehouse.gov – not really
www.brookings.edu – yes
5. www.cato.org – no
www.heritage.org – no
11. www.ksg.harvard.edu/jeffreyliebman – yes
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
3, 5. www.cato.org – no
7. www.heritage.org – no
9, 11. www.ksg.harvard.edu/jeffreyliebman – yes
15. www.ncpa.org – vague, probably not
Raising the payroll tax limit

Google on “Social Security reform proposals”
1. www.whitehouse.gov – not really
2. www.brookings.edu – yes
3, 5. www.cato.org – no
7. www.heritage.org – no
9, 11. www.ksg.harvard.edu/jeffreyliebman – yes
15. www.ncpa.org – vague, probably not
21. www.house.gov/defazio – yes
Raising the payroll tax limit

Impact on labor supply
Raising the payroll tax limit

Impact on labor supply
 alters return to earning wages
Raising the payroll tax limit

Impact on labor supply
 alters return to earning wages
post-tax earnings
1-inc
slope 1-inc-payroll
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
 alters return to earning wages
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
 empirical test #1
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
 empirical test #1
results
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
 empirical test #1
results: people don’t avoid “reverse kink”
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, either because …
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, either because …
post-tax earnings

X
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, either because …
labor supply is very inelastic
post-tax earnings

X
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, or else because …
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, or else because …
post-tax earnings

X
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
?
Raising the payroll tax limit

Impact on labor supply
people don’t avoid “reverse kink”, or else because …
they’re confused
post-tax earnings

X
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
?
Raising the payroll tax limit

Impact on labor supply
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of raising payroll tax limit
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of raising payroll tax limit
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of eliminating payroll tax limit
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of eliminating payroll tax limit
post-tax earnings
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
post-tax earnings
1-inc
slope 1-inc- 0.124
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
(more accurate)
post-tax earnings
1-inc
slope 1-inc - 0.124
2
1-inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
post-tax earnings
1-inc
slope 1-inc - 0.124
2
1-inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
post-tax earnings
1-’inc
2
1-’inc - 0.124
slope 1-inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
 empirical test #2’
post-tax earnings
1-’inc
2
1-’inc - 0.124
slope 1-inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
post-tax earnings
1-’inc
2
1-’inc - 0.124
slope 1-inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
post-tax earnings
1-’’inc
slope 1-inc - 0.124
2
1-’’inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Impact on labor supply
of changing income tax rates on high earners
 empirical test #2’’
post-tax earnings
1-’’inc
slope 1-inc - 0.124
2
1-’’inc - 0.124
2
1
$90,000
pre-tax earnings
Raising the payroll tax limit

Summary
#1 little evidence that people avoid “reverse kink”
#2’ little evidence that labor supply increased following
TRA 86
#2’’ little evidence that labor supply decreased
following OBRA 93
Raising the payroll tax limit

Summary
#1 little evidence that people avoid “reverse kink”
#2’ little evidence that labor supply increased following
TRA 86
#2’’ little evidence that labor supply decreased
following OBRA 93
Raising the payroll tax limit

Summary
#1 little evidence that people avoid “reverse kink”
#2’ little evidence that labor supply increased following
TRA 86
#2’’ little evidence that labor supply decreased
following OBRA 93
Raising the payroll tax limit

Policy implication
could raise payroll tax limit
without adverse effects on labor supply, tax revenue

Caveats
data: not very recent
underlying assumptions: what if labor demand is not
perfectly elastic?
policy implication: what if raising payroll tax limit
reduces confusion?
Raising the payroll tax limit

Policy implication
could raise payroll tax limit
without adverse effects on labor supply, tax revenue

Caveats
data: not very recent
underlying assumptions: what if labor demand is not
perfectly elastic?
policy implication: what if raising payroll tax limit
reduces confusion?
Raising the payroll tax limit

Policy implication
could raise payroll tax limit
without adverse effects on labor supply, tax revenue

Caveats
data: not very recent
underlying assumptions: what if labor demand is not
perfectly elastic?
policy implication: what if raising payroll tax limit
reduces confusion?
Raising the payroll tax limit

Policy implication
could raise payroll tax limit
without adverse effects on labor supply, tax revenue

Caveats
data: not very recent
underlying assumptions: what if labor demand is not
perfectly elastic?
policy implication: what if raising payroll tax limit
reduces confusion?
Raising the payroll tax limit

Policy implication
could raise payroll tax limit
without adverse effects on labor supply, tax revenue

Caveats
data: not very recent
underlying assumptions: what if labor demand is not
perfectly elastic?
policy implication: what if raising payroll tax limit
reduces confusion?