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Key Findings Details

Do Payroll Taxes in the United States Create Bunching at Kink Points?
David Powell
WP 2015-327

• Using data from the Social Security Administration, I exploit two recent short-term changes in payroll taxes to study whether labor earnings responded:

o The Making Work Pay Tax Credit reduced the payroll tax by 6.2 percentage points up to $6,451 ($12,903 for couples) of earnings in 2009 and 2010. I test for bunching at this kink.

o In 2011, payroll taxes were reduced by two percentage points, changing the incentives to bunch at the taxable earnings maximum.

• I find evidence of bunching induced by the payroll tax changes.

• I estimate a tax elasticity of labor earnings of 0.08 at the taxable earnings maximum, which suggests that policy proposals to raise or eliminate the payroll tax cap should consider labor supply behavioral responses to this policy.

• I also estimate larger responsiveness to the Making Work Pay Tax Credit.