Working Paper: NBER ID: w19491
Authors: Alexander M. Gelber; Damon Jones; Daniel W. Sacks
Abstract: We introduce a method for estimating the cost of adjusting earnings, as well as the earnings elasticity. Our method uses information on bunching in the earnings distribution at convex budget set kinks before and after policy-induced changes in the magnitude of the kinks: the larger is the adjustment cost, the smaller is the absolute change in bunching from before to after the policy change. In the context of the Social Security Earnings Test, our results demonstrate that the short-run impact of changes in the effective marginal tax rate can be substantially attenuated.
Keywords: Earnings Adjustment Frictions; Social Security Earnings Test; Elasticity; Bunching; Tax Policy
JEL Codes: H20; H31; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger adjustment cost (D23) | Smaller change in bunching observed (C92) |
| Adjustment frictions (J69) | Impact on earnings behavior in response to policy changes (H31) |
| Changes in effective marginal tax rate (H31) | Earnings behavior (D22) |
| Adjustment frictions (J69) | Attenuation of short-run impact of changes in effective marginal tax rate (H31) |
| Fixed adjustment cost (D24) | Earnings elasticity with respect to net-of-tax rate (H32) |
| Frictionless model (F11) | Average elasticity of 0.19 (D12) |
| Adjustment costs (J30) | Immediate reactions to changes in effective marginal tax rates (H31) |