PARTICIPANTS
Alan Auerbach, John Taylor, John Cochrane, Hoyt Bleakley, Michael Boskin, Doug Branch, Pedro Carvalho, Steve Davis, Katrina Dudley, Christopher Erceg, David Figlio, Peter Fisher, Manon François, Jared Franz, Nick Gebbia, Rick Geddes, Oliver Giesecke, Eric Hanushek, Jason Harrison, Laurie Hodrick, Robert Hodrick, Nicholas Hope, Ken Judd, Daniel Kessler, Mervyn King, Morris Kleiner, Evan Koenig, Donald Koch, David Laidler, Ross Levine, Axel Merk, Ilian Mihov, Brendan Moore, John Pencavel, Paul Peterson, Charles Plosser, Valerie Ramey, Josh Rauh, Stephen Redding, Paola Sapienza, Richard Sousa, Tom Stephenson, Juan Carlos Suarez Serrato, Jack Tatom, Yevgeniy Teryoshin, Harald Uhlig, Victor Valcaracel, Wei Wei, Marc Weidenmeier, Tamar Yerushalmi, Alexanter Zentefis
ISSUES DISCUSSED
Alan Auerbach, Robert D. Burch Professor of Economics and Law, and director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, discussed “The Marginal Net Taxation of Americans’ Labor Supply.” His paper is joint with David Altig (Federal Reserve Bank of Atlanta), Elias Ilin (Boston University and Federal Reserve Bank of Atlanta), Laurence Kotlikoff (Boston University, NBER, and Fiscal Analysis Center), and Victor Yifan Ye (Boston University, Opendoor Technologies, and Stanford Digital Economy Lab).
John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.
PAPER SUMMARY
The U.S. has a plethora of federal and state tax and benefit programs, each with its own, typically major, work incentives and disincentives. Collectively, they place a large share of workers, particularly low-wage workers, in high net (of benefits) tax brackets. This paper uses the Fiscal Analyzer (TFA) to assess how our fiscal policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates cash-flow constraints and all major federal and state tax and benefit policies. We use TFA in conjunction with the 2019 Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates (LMTRs), defined as the present expected (over household survival paths) value of additional current and future taxes, net of benefits, divided by a given increase in current labor earnings. Thus, the LMTR captures double taxation – the increase in future taxes, including asset income and sales taxes, or reduction in future benefits, including those due to income- and asset-based tests – associated with saving a portion of one’s additional current earnings. We calculate annual future net taxes assuming all households smooth their living standards per equivalent adult, subject to borrowing constraints, and supply labor exogenously. These behavioral assumptions let us study labor supply distortions independent of responses to such distortions. Our findings are striking. Over half of working-age Americans face LMTRs above 40 percent. One fourth of households in the bottom remaining lifetime-resource (human plus non-human wealth) quintile face LMTRs above 50 percent; one tenth face LMTRs above 70 percent. Such extremely high work disincentives may be locking large segments of the poor into poverty. These disincentive would be roughly one quarter larger were benefit take-up complete. Top resource households also face major work disincentives. The median LMTR for those in the top 1 percent of the resource distribution is 57.9 percent. We find remarkable dispersion in both LMTRs and current-year marginal net tax rates (CMTRs) even controlling for age, state, and resource level. For example, 5.1 percent of bottom-quintile households face LMTRs above 100 percent; 4.5 percent face negative rates. Simply eliminating bottom- quintile dispersion produces, under simplifying assumptions, efficiency gains as high as one quarter of that quintile’s labor income. Finally, double taxation matters. The median LMTR is 43.1 percent – nearly one third larger than the 33.3 percent median CMTR, which ignores future net taxes generated by additional current earnings.
To read the paper, click here
To read the slides, click here
WATCH THE SEMINAR
Topic: “The Marginal Net Taxation of Americans’ Labor Supply”
Start Time: January 22, 2025, 12:00 PM PT
