Intra-household labour income responses to changes in tax rates among older workers / by Derek Messacar. : CS11-0019/400E-PDF

"Despite a large literature estimating the effects of income taxation on the labour decisions of young and middle-aged workers, little is known about the extent to which older workers respond to changes in their income taxes. This paper explores this unresolved empirical issue, using longitudinal administrative data on more than one million individuals from Canada and exploiting a recent tax reform in the empirical identification strategy that explicitly targeted older couples. Specifically, this paper makes two contributions. First, older workers are shown to respond meaningfully to changes in their income taxes; however, in contrast with standard predictions, they are responsive to the average—not the marginal—tax rate. The compensated elasticities of labour income with respect to the average and marginal net-of-tax shares are estimated to be 0.421 and -0.112 conditional on being employed, respectively, of which only the former is statistically significant. In addition, each 1% increase in total after-tax income reduces the likelihood of being employed by 1.6 to 2.3 percentage points. Second, changes in individuals’ taxes have spillover effects on the employment and labour income decisions of their spouses, although the income pooling prediction of the unitary model is rejected empirically. These findings offer new insight into the “black box” of intra-household labour supply and inform the optimal designs of income tax and retirement income systems"--Abstract.

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