Does it Pay, at the Margin, to Work and Save? -- Measuring Effective Marginal Taxes on Americans&Apos; Labor Supply and Saving

73 Pages Posted: 6 Dec 2006  

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

David Rapson

Boston University

Date Written: September 2006

Abstract

Building on Gokhale, Kotlikoff, and Sluchynsky's (2002) study of Americans' incentives to work full or part time, this paper uses ESPlanner, a life-cycle financial planning program, in conjunction with detailed modeling of transfer programs to determine a) total marginal net tax rates on current labor supply, b) total net marginal tax rates on life-cycle labor supply, c) total net marginal tax rates on saving, and d) the tax-arbitrage opportunities available from contributing to retirement accounts. In seeking to provide the most comprehensive analysis to date of fiscal incentives, the paper incorporates federal and state personal income taxes, the FICA payroll tax, federal and state corporate income taxes, federal and state sales and excise taxes, Social Security benefits, Medicare benefits, Medicaid benefits, Foods Stamps, welfare (TAFCD) benefits, and other transfer program benefits. The paper offers four main takeaways. First, thanks to the incredible complexity of the U.S. fiscal system, it's impossible for anyone to understand her incentive to work, save, or contribute to retirement accounts absent highly advanced computer technology and software. Second, the U.S. fiscal system provides most households with very strong reasons to limit their labor supply and saving. Third, the system offers very high-income young and middle aged households as well as most older households tremendous opportunities to arbitrage the tax system by contributing to retirement accounts. Fourth, the patterns by age and income of marginal net tax rates on earnings, marginal net tax rates on saving, and tax-arbitrage opportunities can be summarized with one word -- bizarre.

Suggested Citation

Kotlikoff, Laurence J. and Rapson, David, Does it Pay, at the Margin, to Work and Save? -- Measuring Effective Marginal Taxes on Americans&Apos; Labor Supply and Saving (September 2006). NBER Working Paper No. w12533. Available at SSRN: https://ssrn.com/abstract=947794

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4002 (Phone)
617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

David Rapson

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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