Intra-household Labour Income Responses to Changes in Tax Rates Among Older Workers /

The compensated elasticities of labour income with respect to the average and marginal net-of-tax shares are 0.421 and -0.112, respectively, of which only the former is statistically significant.2 These findings support the “schmeduling” hypothesis of Liebman and Zeckhauser (2004), which posits that individuals use the average price as a proxy for the marginal price when nonlinear 1. The net-of-ta [...] The empirical model extends the work of Gruber and Saez (2002), Gelber (2014), and the related literature by expressing the change in the individual’s log of labour income to the changes in the individual’s log of the net-of-tax share and log of total after-tax income, as well as the direct adjustment to the spouse’s log of labour income. [...] The regression parameters of interest are: 1) 0 , the substitution response to a marginal deviation in the price of labour; and 2) 0 , the income effect of the change in total after-tax income. [...] The expectation is that an increase in the after-tax income of the individual makes leisure more affordable and reduces the incidence of being employed, ˆ0 0. While mean-reversion and distributional changes in income are less of an issue in the extensive-margin analysis, a 10-piece spline for lagged labour income is still included, as described in the Table 2 notes. [...] To the extent that individuals understand the income tax schedule and the lack of response to the marginal net-of-tax share correctly indicates that labour income is unresponsive to changes in tax rates, the expectation is that ˆ ˆ a 1 1 0. In contrast, the schmeduling hypothesis predicts that ˆ.