Participation tax rates and extensive margin labor supply

[MattHJensen]

It would be helpful to separately estimate the extensive and intensive margin labor supply effects of the UBI reforms that we implement. It is not clear that they would go in the same direction.

As section 4.1.2 of the Mirrlees review notes:

The tax and benefit system can affect the incentive to be in paid work at all and the incentive for someone already in work to earn a little more. The first effect is measured by the participation tax rate (PTR), the second by the effective marginal tax rate (EMTR).

We should

1. review the literature on extensive and intensive labor supply
   • to identify the standard specifications of labor supply elasticities for the extensive margin (w.r.t PTR) and intensive margin (w.r.t. EMTR).
   • to identify a reasonable range for the elasticities themselves
2. Add the capability to estimate PTRs stemming from transfer programs to C-TAM.
3. Estimate PTRs stemming from tax programs from Tax-Calculator. (optional: submit a PR for discussion to make this a built in capability)
4. (We already know that we can estimate MTRs for both tax and transfer programs.)
5. Generate separate predictions for the change in extensive and intensive labor supply for the UBI reform.

cc @feenberg @econ02 @Amy-Xu @andersonfrailey (and @codykallen since he's given this some thought already)

[econ02]

Point 2

Given

PTR = 1 - ([Net Income in Work - Net Income Out of Work] / Gross Earnings)

The value of each C-TAM transfer program must be applied to either the "Net Income in Work" or "Net Income Out of Work" category, correct?

A few questions: Should this be done so that programs with a work requirement are included under the Net Income in Work category, while those without a work requirement are not? How should Social Security be treated? I assume with the repeal of Social Security (and the earnings cap) and the implementation of an UBI, you may have older individuals re-entering the workforce. Is it appropriate to include the value of Medicare or Medicaid, but not the value of employer-provided health care programs when calculating the PTR? Not including the value of health care for one group of people, but including the health care value for another group of people, may be distortionary.

Thoughts?

@MattHJensen

[codykallen]

Point 1: Review the literature on extensive and intensive labor supply The intensive margin elasticities are not difficult to deal with, and there is no shortage of literature on the subject. The elasticity on the extensive margin is more difficult. One of the problems involved is that previous empirical work has generally found an insignificant income elasticity effect (the closest to the PTR). Part of the problem is that the decision of whether or not to work depends a great deal on age, income level (or potential), and net wealth. At the very least, we should have different elasticities by age, as @econ02 pointed out.

Points 2 and 3: Add the capability to estimate PTRs stemming from transfer programs to C-TAM. Estimate PTRs stemming from tax programs from Tax-Calculator.

Realistically, we should be estimating these together. As noted above, the equation for PTR is

PTR = 1 - ([Net Income in Work - Net Income Out of Work] / Gross Earnings)

I think we would need to estimate Net Income in Work using Tax-Calculator and C-TAM, and estimate Net Income Out of Work using C-Tam.

[econ02]

@codykallen Re: Net Income in Work and Net Income Out of Work

Net Income In Work should account for other forms of income from employers (such as health care, 401K contributions). Otherwise, we would be underestimating the Net Income of employed, non benefit-receiving individuals compared to their benefit-receiving counterparts.

Net Income Out of Work may vary substantially on a state-by-state basis. Programs such as SNAP are funded by the Federal government but the states share administrative costs. Some states provide waivers to limit their administrative costs, while the Federal government pays for the SNAP benefits. Tax-Calculator Issue #403 mentions a state-level data set coming this fall, which may provide the data to account for state benefit differences.

[econ02]

As part of the literature review, I have been collecting labor supply elasticity estimates on both the extensive and intensive margin (attached). I am still going through papers and adding more.

The hope is that there is enough variation in elasticity estimates from the literature that they can be imputed for individual in a tax unit. Let me know your thoughts @codykallen

labor supply elasticity.xlsx

[econ02]

Here is what I have so far regarding the literature review. I am now adding more estimates to the spreadsheet. @MattHJensen Master Doc II.docx