Earnings Responses to Increases in Payroll Taxes
Jeffrey Liebman, Harvard University and NBER
Emmanuel Saez, University of California, Berkeley and NBER
September 2006
Abstract
This paper uses SIPP data matched to longitudinal uncapped earnings records from the
Social Security Administration for 1981 to 1999 in order to analyze earnings responses to
increases in tax rates and inform discussions about the likely effects of raising the Social
Security taxable maximum. The earnings distribution of workers around the current
taxable maximum is inconsistent with an annual model in which people are highly
responsive to the payroll tax rate, even in the subset of self-employed individuals. Panel
data on married men with high earnings display a tremendous increase in earnings over
the 1980s and 1990s relative to other groups, with no clear breaks around the key tax
reforms. This suggests that other income groups cannot serve as a control group for the
high earners. Our analysis does not support the finding of a large behavioral response to
taxation by wives of high earners. We actually find a decrease in the labor supply of
wives of high earners around both the 1986 and the 1993 tax reforms, which we attribute
to an income effect due to the surge in primary earnings at the top. Policy simulations
suggest that with an earnings elasticity of 0.5, lost income tax revenue and increased
deadweight loss would swamp any benefits from the increase in payroll tax revenue. In
contrast, with an elasticity of 0.2, the ratio of the gain in OASDI revenue to lost income
tax revenue and deadweight loss would be much greater.
This research was supported by the U.S. Social Security Administration through grant #10-P-98363-1-01 to
the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The
research in this paper was conducted while Liebman was a Special Sworn Status researcher of the U.S.
Census Bureau at the Boston Census...