Title

TAXATION, SOCIAL SECURITY, AND HEALTH INSURANCE

Date of Award

June 2014

Degree Type

Dissertation

Embargo Date

8-1-2015

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Advisor(s)

Leonard Burman

Keywords

Health Insurance, Social Security, Taxation

Subject Categories

Social and Behavioral Sciences

Abstract

This dissertation is composed of three papers that study aspects in social insurance system in the U.S. The first paper seeks to further understand the effect of public insurance expansions on private insurance market. In particular, it investigates the spillover effect of the State Children's Health Insurance Program (SCHIP)--the most recent and largest public insurance expansion prior to the Affordable Care Act (ACA)--on employer-sponsored insurance (ESI) premiums. The last two papers explore distortions of tax provisions in the Social Security system on older taxpayers' economic behavior.

In the first paper, I analyze the extent to which ESI premiums are affected by SCHIP. ESI premiums can be affected because the health composition of the ESI pool may change due to the crowd-out effect. The lower income families that are eligible for public health insurance tend to have worse health than the average working family (National Center for Health Statistics, 2012). Therefore, individuals who drop ESI coverage once their children become eligible for SCHIP or their children have worse than average health. The resulting ESI risk pool becomes less costly to insurance companies, which leads to a decline of the average premiums for those who remain in the ESI insurance pool. Thus, overall premiums would decline even though the majority in the pool is not eligible for public insurance. My estimates, relying on variations in time of implementation and size of expansions across states, indicate that ESI premiums would have increased by about two percent, had SCHIP not been expanded. It confirms that the SCHIP- eligible children and their family members who give up ESI have relatively poor health.

The second paper investigates older taxpayers' response to the taxation of Social Security benefits in two dimensions, income responses and Social Security claiming decisions, using a nonparametric graphical methodology and a panel of administrative data from individual income

tax and information returns. Social Security benefits are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage labor supply of older workers. While previous research found that the labor supply of older workers is significantly affected by the Social Security earnings test and the implicit taxes created by the Social Security benefit formula, we find little evidence of response to the benefit taxation. Only single, self-employed people show any evidence of reducing their Modified Adjusted Gross Income (MAGI) to avoid the tax and the response is much smaller and less precisely estimated than the response Saez (2010) found to the phase-out of the Earned Income Tax Credit. Similarly, while the taxation of benefits provides an incentive for many to delay claiming, we find no evidence of such an effect. Overall, the findings suggest that the taxation of benefits creates little distortion on older taxpayers if they completely understand the taxation. Or older taxpayers have little understanding of the rules governing Social Security benefit taxation.

The last paper studies the effect of the Social Security earnings test on economic behavior of the elderly. This paper provides a new piece of evidence to the relatively large literature of the earnings test, which has found inconsistent labor market responses. It builds upon the non- parametric methodology developed by Saez (2010) to quantify the compensated elasticity of income with respect to the net-of-tax rate using bunching behavior discovered in income distributions. Draw the same administrative data as in the second paper, we observe significant clustering to the left of the exempt amount for 63-64 year olds, who are the candidates subjected to the earnings test. The significant bunching translates into 0.04-0.09 in the compensated elasticity of income for the overall sample. Moreover, both the bunching and the significant elasticity are driven by wage earners. It reflects real behavioral responses rather than adjustments in the reporting process that is possible among the self-employed because wage income is

reported by a third party to the tax authority and thus is less susceptible to manipulation than income from self-employment.

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