TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 17, 2013

Mulligan: Aging, Taxes and the State of the Labor Market

New York Times:  Aging, Taxes and the State of the Labor Market, by Casey B. Mulligan (University of Chicago, Department of Economics):

Both aging and taxes will prevent the usual labor market metrics from getting back to their pre-recession levels. ...

Economists disagree about many things, but they seem to agree with the basic idea that the lack of recovery is partly attributable to population aging, and that policy makers cannot stop the aging process. ...

But aging is not the only change affecting labor supply. Marginal tax rates have increased five percentage points since 2007 and will increase another five percentage points over the next 15 months, a trend attributed especially to expansions in health and other safety net programs. By 2015, a typical worker will keep only half of the value created by employment, compared with 60 percent kept before the recession.

Economists have traditionally recognized that a 17 percent reduction in the reward to working (from keeping 60 to keeping 50) would significantly contract the labor market, and do so at least as much as the 2 percent that the aging of the baby boom does. Yet this time many economists are reluctant to acknowledge marginal tax rate increases, even though marginal tax rates affect labor supply in many of the same ways that aging does.

Perhaps the economists who are silent about marginal tax rate hikes are worried that acknowledging the new rates would overshadow their well-intentioned origins: helping the poor, the unemployed and people without health insurance.

(Hat Tip: Mike Talbert.)

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What is a "typical worker?"

I've given counsel and advice to a lot of people the past five years, including many boomers, and not one of them have told me they were leaving the labor market because of tax rates.

In fact, in nearly 40 years, I have never had anyone (ranging from 17 year olds to wealthy business owners and professionals) tell me they were cutting back on work due to tax rates.

Many boomers have been unemployed and/or underemployed because there were no jobs or the jobs were lousy.

And keep in mind 401(k) plans were devastated twice in a ten year period, which is a powerful incentive for boomers to continue working, if work can be had.

This does not compute.

Posted by: save_the_rustbelt | Oct 17, 2013 6:49:08 AM

I'm a CPA and the statement that marginal rates are up 10% seems to be a fabrication.

Posted by: Terry Campbell | Oct 17, 2013 9:49:22 AM

that's a nice sleight of hand to switch from marginal "tax" rates (which include, in his definition of the term, foregone subsidies, including newly created tax credits for purchasing health insurance - tax credits that relatively few people will actually take advantage of) to average taxes. in a completely inaccurate way, mind you.

consider this sentence "By 2015, a typical worker will keep only half of the value created by employment, compared with 60 percent kept before the recession."

that phrasing clearly implicates average tax rate, but his evidence for his version of tax rates being that high relates to marginal rates. i guess he realized that only keeping 60% of a marginal dollar versus 50% of a marginal dollar has less rhetorical power than claiming that the higher "tax" rate applies to all of the earnings of a "typical worker".

Posted by: anders | Oct 17, 2013 9:56:16 AM