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International Tax and Public Finance

Erschienen in:

01.08.2017

Married couple work participation and earnings elasticities: evidence from tax data

verfasst von: Emily Y. Lin, Patricia K. Tong

Erschienen in: International Tax and Public Finance | Ausgabe 6/2017

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Abstract

This paper uses administrative tax panel data to estimate work participation and earnings elasticities of married couples by exploiting variation in tax policy. Not only may individuals alter labor supply by working more or less in response to changes in tax policy, they may also alter reported earnings or shift income between taxable and tax-deferred compensation. As a result, in addition to estimating the standard extensive and intensive labor supply elasticities, we also examine elasticities by type of income (wage earnings vs. self-employment earnings) and compensation (taxable vs. tax-deferred). We find that wives have more elastic work participation and earnings than husbands. Furthermore, self-employment income is more responsive to net-of-tax price changes than wage earnings for both husbands and wives, suggesting that it is easier for the self-employed to alter their work hours, work intensity, and/or reported income than wage earners. Finally, we find that wives respond to changes in the net-of-tax price of earnings by altering the amount of earnings subject to current-year taxes through adjustments of tax-deferred contributions to employer-provided retirement accounts.

Vorheriger Artikel Corporate flat tax reforms and businesses’ investment decisions: evidence from Switzerland

Nächster Artikel Information, belief elicitation and threshold effects in the 5X1000 tax scheme: a framed field experiment

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Examples include articles published by U.S. News and World Report (http://money.usnews.com/money/retirement/articles/2014/11/17/dont-forget-these-year-end-retirement-planning-tips) and Intuit, the manufacturer of Turbo Tax (https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Top-8-Year-End-Tax-Tips/INF12120.html).

McClelland et al. (2014) use panel tax data to compare the labor supply elasticities of married women with those of the lower-earning spouse.

The sample used for analysis in McClelland et al. (2014) consists of 210,904 tax returns while our sample consists of 2.5 million tax returns.

Couples are selected based on the last two digits of the primary filer’s Social Security number. Standard errors are clustered at the couple level to account for couples who show up in more than one panel. As a robustness check, we select one-tenth of the couples each year from our existing data to construct a 0.1% random sample that contains different couples for each panel. The estimation results using this 0.1% random sample are consistent with our main findings, but are less precise due to the smaller sample size.

Approximately 57.8% of married-filing-jointly couples in tax years 2000 through 2009 were in this age range. The sample does not include married-filing-separately returns because we are concerned about data noise. Those who file as married-filing-separately generally have very different circumstances, e.g., in the process of divorcing or filing separately to maintain separate financials, from joint filers, and thus their labor supply may respond to tax changes differently from that of joint filers. Only 2.3% of married individuals who filed a tax return in tax year 2009 filed as married-filing-separately.

The literature either measures a 3-year difference (e.g., Gruber and Saez 2002) or 2-year difference (e.g., Weber 2014) in the outcome variable, and both Gruber and Saez (2002) and Weber (2014) find that their estimates are robust to the length of the panel chosen, whether it is a 1-, 2-, or 3-year difference.

Couples report joint earnings on their tax return Form 1040. In contrast to joint information, certain individual-level tax data are available to distinguish the husband’s employment from the wife’s. We use Form W-2 to identify wage earners, and use Schedule C, Form 1099-MISC, and Schedule SE for self-employed persons. Employers file a Form W-2 for each employee to report compensation paid for services performed by the employee. Schedule C reports profit or loss from non-farm sole proprietorships. Independent contractors are generally issued a 1099-MISC by payers with the payments reported as non-employee compensation. Self-employed individuals, including independent contractors, with self-employment earnings above $400 are required to file a Schedule SE for self-employment tax purposes. Using Schedule C and 1099-MISC in addition to Schedule SE will include persons with a negative or small amount of self-employment income.

Many factors other than hours worked affect taxable self-employment income. We discuss labor versus non-labor responses of self-employment income in the results and concluding sections.

Earnings include wages on a Form W-2 and self-employment income on a Schedule SE. About 2% of workers are dropped from the intensive margin analysis due to missing earnings. This occurs because of the reporting floor for self-employment taxes noted in a previous footnote and the exclusion of workers with less than $100 of earnings. In addition, Schedule SE income is missing for a small number of independent contractors.

For each tax year, the Statistics of Income (SOI) Division of the IRS draws a stratified random sample from all individual income tax returns. We selected from the 2009 file those aged 25–54 who filed a joint return.

These statistics are comparable to those based on the 2008 Panel of the Survey of Income and Program Participation (SIPP) documented by Dushi and Iams (2013). Dushi and Iams (2013) estimate that 51% of working husbands and 29% of their wives contributed to a defined contribution retirement plan and the average contributions, conditional on making a contribution, were $5697 for husbands and $3943 for wives in 2009. The contribution rate is 50% for working husbands in our sample.

This is the CPI for all urban consumers for all items in the US city average for the 12 months ending in August of each year.

We grow out itemized deductions if the taxpayer itemizes in year $t-2$ and use the number of the dependents in the base-year to calculate the counterfactual after-tax labor and non-labor incomes in year t.

The administrative tax data are available from 1999 onward, but the 1999 file contains incomplete information about family dependents. Observations from the 2000–2002 pair are thus excluded from this alternative specification due to incomplete data for 1999. In addition, using lagged incomes for instruments requires basing the analysis on couples who stay married for 4 years (i.e., 3 years over the panel plus one lagged year), which further reduces the sample size.

Standard errors are clustered at the couple level to account for correlation in the error term within couples who appear more than once in the data. First stage F-statistics are well above 10, passing Staiger and Stock’s (1997) weak instrument test. Coefficient estimates from the first stage are available from the authors upon request.

Elasticity is estimated as the coefficient divided by the work participation rate in year t.

Standard errors are clustered at the couple level to account for correlation in the error term within couples who appear more than once in the data. First stage F-statistics in all but one case are well above 10, passing Staiger and Stock’s (1997) weak instrument test. When the lagged base-year incomes are used to instrument for current-year incomes, the first stage F-statistic is 8.1 in the regression for husbands. Coefficient estimates from the first stage are available from the authors upon request.

As for the other covariates, the growth in husbands’ earnings is negatively associated with increases in the state unemployment rate and positively associated with having children. In addition, the wife’s age is positively associated with the growth in the husband’s wages but not the self-employment income. The husband’s age, on the other hand, is negatively associated with the growth in his self-employment income.

As for the other covariates, while the wife’s age is positively related to wages, it is negatively related to self-employment income. Furthermore, compared to not having a child, having children under the age of 6 is negatively related to the growth in every type of earnings and having children age 6–16 is negatively related to the wage growth. An increase in the state unemployment rate also negatively affects all types of earnings for wives.

This analysis focuses on employment-based retirement accounts. Tax-deductible contributions to traditional Individual Retirement Accounts (IRAs) are not included in the outcome variable. We have separately run the regression on IRA contributions (results not shown), and found the coefficients of the net-of-tax price statistically insignificant and in the wrong sign for both husbands and wives.

For this analysis, the instrumental variables are constructed using base-year incomes, and the 10-piece spline in base-year earnings is included as income controls. This is our preferred specification in Table 3. The elasticity of taxable income literature generally uses spline specifications as income controls. In addition, base-year incomes, instead of lagged incomes, are used as the instruments because the latter results in relatively large standard errors as well as weak instruments for husbands in Table 3.

We define an individual as having a job change if the Employer Identification Numbers (EINs) on the individual’s W-2s in base year $t-2$ are different from the set of EINs in t. This method likely over identifies job changes since one firm may issue W-2s using more than one EIN.

We also redid the estimation by high and low earner where earner status is defined based on base-year earnings. About 77% of the high earners are husbands. In general, the estimated substitution elasticities for high earners are similar to those of husbands, and the estimated substitution elasticities for low earners are similar to those of wives. However, low earners have more elastic labor supply in the intensive margin than wives do, and their retirement contributions are not responsive to tax changes. These results are available upon request.

The way the explanatory variables are calculated for simultaneous movers is the same as the calculation for first movers in that the variables are based on inflated, instead of actual, earnings of the spouse.

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Titel: Married couple work participation and earnings elasticities: evidence from tax data
verfasst von: Emily Y. Lin
Patricia K. Tong
Publikationsdatum: 01.08.2017
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 6/2017
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-017-9470-3

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