The optimal earnings test and retirement behavior

Masayuki Okada ()
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Masayuki Okada: New York University

International Tax and Public Finance, 2023, vol. 30, issue 4, No 5, 1036-1068

Abstract: Abstract This paper quantitatively derives the welfare-improving earnings test within an optimal income tax framework. I construct a life cycle model of labor supply and savings to compute social welfare. The preference parameters are estimated by the method of simulated moments using Japanese data. I find that social welfare under the current earnings test with large changes of marginal tax rates at thresholds is substantially lower than social welfare under the earnings test with a linear tax rate. In addition, an earnings test with negative marginal tax rates will increase social welfare more than a system without negative marginal tax rates.

Keywords: Earnings test; Retirement; Optimal income tax; Negative marginal tax rate (search for similar items in EconPapers)
JEL-codes: H21 H55 J22 J26 J32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:30:y:2023:i:4:d:10.1007_s10797-022-09734-0

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DOI: 10.1007/s10797-022-09734-0

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