SOCIAL SECURITY AND LABOR SUPPLY INCENTIVES

Many provisions of the Social Security program distort an individual's labor supply incentives. In particular, the payroll tax, the earnings test, the offsetting actuarial adjustment, and the dependence of the size of future benefits on the level of current earnings all affect the net return to extra work. The purpose of this paper is to estimate the size of the net tax rate on labor income in a variety of circumstances, taking into account all these provisions, as well as the personal income tax. We find that the Social Security Program on net in the past has provided a large subsidy to labor supply, which for many people effectively offset the personal income tax. This subsidy rate, however, has been declining steadily over time     

Achieving the triple dividend in Portugal: a dynamic general-equilibrium evaluation of a carbon tax indexed to emissions trading

Using a dynamic general equilibrium model, we simulate the environmental, economic, and budgetary effects in Portugal of a new carbon tax indexed to the carbon price in the European Union’s Emissions Trading System market. Through careful recycling of the carbon tax revenues to finance lower personal income taxes, lower Social Security contributions, and higher investment tax credits – in particular when changes are directed at promoting energy efficiency – we show that it is possible to design a carbon tax reform that boosts economic growth and strengthens fiscal consolidation. These results served as the basis for a new carbon tax eventually approved by the Portuguese Parliament.     

SOCIAL SECURITY DEPENDENT BENEFITS,NET PAYROLL TAX,AND MARRIED WOMEN'S LABOR SUPPLY

This paper examines how Social Security dependent benefits impact the labor supply of married women aged 25–54. Specifically, I investigate whether the decrease in the rate of return to women's work discourages them from participating in the labor force by simulating expected net payroll tax rates and dependent benefits. Dependent benefits may reduce the net return to women's work, as they usually pay the full payroll tax without receiving marginal benefits for additional earnings if they claim benefits based on their husbands' earnings records. The results show that high net payroll tax rates reduce married women's work incentives, particularly those near retirement age. (JEL H24, H55, J22)     

The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour

This paper estimates a life cycle model of labour supply, retirement, and savings behaviour in which future health status and wages are uncertain. Individuals face a fixed cost of work and cannot borrow against future labour, pension, or Social Security income. The method of simulated moments is used to match the life cycle profiles of labour force participation, hours worked, and assets that are estimated from the data to those that are generated by the model. The model establishes that the tax structure of the Social Security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65. Removing the tax wedge embedded in the Social Security earnings test for individuals aged 65 and older would delay job exit by almost one year. By contrast, Social Security benefit levels, health, and borrowing constraints are less important determinants of job exit at older ages. For example, reducing Social Security benefits by 20% would cause workers to delay exit from the labour force by only three months.     

A macroeconomic analysis of sales and payroll tax cuts

This paper analyzes the short-run impact of sales and payroll tax cuts in a complete macroeconomic model which explicitly involves the government financing constraint. Sales and payroll tax cuts have been stressed as good measures for achieving once-for-all price level reductions. We demonstrate that in quite plausible circumstances, cuts in these taxes (financed by an increase in the personal tax rate) result in the price level increasing, not decreasing. Also, it is shown that a policy package involving a wage subsidy and a profits tax hike must involve employment and investment moving in the same, not the opposite, direction.     

DISENTANGLING THE ANNUITY FROM THE REDISTRIBUTIVE ASPECTS OF SOCIAL SECURITY IN THE UNITED STATES*

In the United States, the life-cycle relationship between initial Social Security contributions and subsequent benefits causes the effect of Social Security on income distribution to be overestimated in a single-period analytical framework. By separating the annuity from the redistributive aspects of Social Security we provide a life-cycle framework for measuring its net effect on redistribution. To this point in its history, we find all income classes have received positive net life-cycle income transfers and, in an absolute sense, upper-income groups have done at least as well as lower-income groups. This suggests a reason for the near-universal support of Social Security by past generations, as well as the controversy which now surrounds it. As it becomes apparent to younger cohorts of taxpayers that many of them will be net losers, it is inevitable that Social Security will be subject to the same controversy as other welfare programs which attempt to redistribute income.     

Internal debt and welfare

This paper analyzes how multinational firms' internal debt financing affects high-tax countries. It uses a dynamic small open economy model and takes into account that internal debt impacts both the multinational firms' investment decisions and the government's tax policy. The government has incentives to redistribute income from firm owners to workers. If the government's redistributive motive is not too strong, internal debt reduces welfare in the short term by decreasing tax revenues. However, debt financing stimulates capital accumulation and exerts a positive long-term welfare impact.     

THE EFFECT OF THE BUSINESS CYCLE ON FRESHMAN FINANCIAL AID

When the economy slips into recession, more needy students enroll in college, increasing the need for financial aid while resources for aid become more scarce. We use “Freshman Survey” data from the Higher Education Research Institute to observe changes in financial aid composition from 1980 to 2000. We use state‐level tax revenues, unemployment rates, and personal income growth as macroeconomic indicators. During recessions, we find that the burden of financing a student's college education shifts from states and institutions to families and federal programs. We also show that these macroeconomic fluctuations are increasingly volatile for underrepresented minorities. (JEL I22, H52, E32)     

An Analysis of the Corporate Income Tax Policy of Less Developed Countries

Unlike in developed countries, corporate rather than personal tax is the greater source of public finance for less developed countries (LDCs). This paper analyzes the corporate income tax policy for a large panel of LDCs. The analysis shows that although the corporate tax rate has been decreasing, corporate tax revenues have been increasing. Contrary to standard tax competition theory, there is also strong evidence that corporate income taxes are increasing with respect to the LDCs’ openness, as measured by capital mobility. The analysis also shows that the corporate tax rate is increasing with respect to the personal tax rate, as income‐shifting theory predicts.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Taxes,Strikes and Wages

A union and a firm bargain about wage increases. The firm possesses private information about its revenues. A two-period screening model is used to derive equilibrium wage demands by the union and to calculate measures of strike activity. Changes in wage demands and dispute probabilities due to alterations in various taxes are analysed. A more progressive income tax, a lower level of income taxes and higher payroll taxes reduce wages and strike activity. Hence, tax policy can be used not only to affect wages and employment, but lso to influence strike incidence.     

Social security generosity,budgetary deficits and reforms in North Cyprus

This paper estimates the fiscal burden of the historical pay-as-you-go (PAYGO) Social Insurance Pension System in North Cyprus and analyzes the appropriateness of the 2008 reforms that introduced the new Social Security Pension System. Estimates are made of the system deficit. To bring the magnitude of the unfunded cost of the pension system down to a sustainable level, major parametric reforms will need to be made to the system. These include increasing the age of retirement, increasing the rate of contributions, changing the method of indexing of pension benefits and decreasing the theoretical replacement rate of the pension benefits.     

Optimum income taxation and layoff taxes

This paper analyzes optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed).     

Striking a balance: Optimal tax policy with labor market duality

We develop a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers “secondary contracts.” When calibrated using aggregate tax revenue data, the model delivers estimates of secondary “off the books” employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.     

Sustainable social security: Four options

Four options to make the social security sustainable under the coming demographic shift are presented; increase payroll taxes by 6 percentage points, reduce replacement rates by one-third, raise the normal retirement age to 73, or means-test the benefits and reduce them in income. The paper accounts for labor supply at both intensive and extensive margins and analyzes welfare effects across agents that differ in age, wealth and cohorts. While the four policies all achieve the same goal, economic outcomes differ significantly. Options to curtail benefits encourage own savings and capital accumulation, while the payroll tax increase and the means-test reduce work effort. Future generations prefer options to reduce benefits, but current generations prefer to finance the transition with payroll taxes.     

Tax structure and public sector growth

It has been hypothesized that a jurisdiction's tax structure exerts an indipendent effect upon the growth of its public sector. We test this hypothesis by examining the relationship between the growth of state general expenditure and the elasticity of tax revenues with respect to income. The work takes advantage of a very careful set of income elasticities for the personal income and sales tax systems for each state, for every year from 1978 to 1983. The main conclusion is that the data do not support the notion that the form of the tax structure exerts an independent effect on public sector growth.     

Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

This study investigates how unfunded public pensions financed by value added tax (VAT), as discussed in Japan, affect economic growth and whether payroll tax (PT) or VAT is the more growth‐friendly tax structure for financing public pensions. We examine these issues using overlapping generations models with parental altruism and find that a public pension system financed by VAT may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT are more growth‐friendly than those financed by PT.     

Convergence Analysis of the Structure of Social Protection Financing

Expenditure on social protection in the European Union (EU) member states has been increasing rapidly over the last decade. To cover the increasing expenses, the countries need to find ways to increase revenues. Social protection financing systems and structure of financing vary across countries, but all of them use mainly two sources for financing: general government contributions and social tax revenue. The aim of this paper is to study the development of the structure of social protection financing at the main contributor level over the last decade, defining the trends that characterize the changes. We concentrate on convergence analysis of the structure of social protection financing, which is an important but, so far, insufficiently studied issue.This paper was presented at the 57th IAES Conference in Lisbon, March 10–14, 2004. The authors would like to thank the discussants in that session for their helpful suggestions. This paper was prepared with the support of the Estonian Science Foundation research grant. We wish to thank Reet Maldre for the assistance     

Home production and Social Security reform

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. Specifically, home production takes housing, home input, and home hours as inputs and produces a good that is substitutable with market good. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we conduct a policy experiment where we eliminate the current pay-as-you-go Social Security system. We find that the experiment has important implications for labor supply as well as consumption decisions and that these decisions are influenced by the presence of the home production technology. More importantly, comparing our economy to a one-good economy without home production, the welfare gains of eliminating Social Security are magnified significantly especially in the long run. The reasons are twofold and related to the general aspects of home production. First, home production implies a more elastic labor supply rendering the payroll labor tax more distortionary. Second, home production introduces insurance possibilities that are not present when only market-produced goods are available and, thus, reduces the need for government redistributive policies.     

Environmental Tax Reform and Growth: Income Tax Cuts or Profits Tax Reduction

This study investigates how recycling revenues, which are generated by environmental taxes, affect growth through different types of tax cuts. A growth model with creative destruction (Aghion and Howitt Econometrica 60(2):323–351,1992, Aghion and Howitt The economics of growth, 2009) is modified to include the production of final output as a source of pollution. This paper demonstrates that introducing an environmental tax, accompanied by either an income tax cut or a profits tax reduction, increases the output growth rate. The analysis also shows that, if technological change is resulted from deliberate activities of economic agents, the reduction of the profits tax rate for an intermediate monopolist is more growth-enhancing than an income tax cut since a profits tax reduction directly promotes R&D activities.