| This thesis investigates the effect of the social security payroll tax on the individual labor supply function. In the income-leisure choice model, the payroll tax with a ceiling on taxable labor earnings creates a nonconvex budget line. The individual labor supply function then exhibits a jump at some wage rate. When the nonconvex budget line shifts, nonmarginal labor supply responses complicate the comparative statics. In order to illustrate these problems, a Stone-Geary utility function is adopted to derive the individual labor supply function. Altering various parameters, different labor supply functions are derived with particular attention to changes in the wage at which the labor supply jump occurs.;Then, an empirical study is made of the impact of the payroll tax and the taxable ceiling in the context of the income-leisure model. For three specifications of the labor supply function--additive linear, curvilinear, and Stone-Geary--a dichotomous variable is introduced that takes the value of zero for labor incomes below the taxable ceiling and one for those above the taxable ceiling. The sample is taken from the Panel Study of Income Dynamics and is composed of working heads of households, strongly attached to the labor market in 1973, and without working spouse. After examining the full sample regressions and cross tabulations heterogeneity from low and high income groups was evident in the sample. In order to capture the behavior of a more homogeneous population, the sample was truncated at a labor income of ;Next, the time path of labor supply in the life cycle model is examined. After reviewing consumption and labor supply behavior without the social security system, the budget constraint under certainty conditions is shown to be altered by the social security system. Utilizing the maximum principle, optimal conditions are derived that depend on marginal future benefits, the payroll tax rate, and the rate of return on private and social security wealth. These optimal conditions lead to a complicated leisure time path that reduces to the no social security time path if the marginal benefit of social security is zero, nevertheless, initial conditions would still alter the solution. Furthermore, a simple proportional wage tax effects the choice of retirement under conditions where there is no complicated earnings test or social security system. |
