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Technical Analysis Paper
August 1978

Congress of the United States
Congressional Budget Office
Washington, D.C.




The Congress of the United States
Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402
Stock Number 052-070-04649-0



Aggregate Economic Effects of Changes in Social Security Taxes
discusses the general economic consequences of the 1977 Social
Security Amendments that raised payroll taxes considerably.
contrast to most social security actions, this particular act
increased payroll taxes without also increasing benefit payments.
The paper reviews some previous studies on effects of social
security taxes and then focuses directly on the consequences
of the 1977 Amendments.
The study was prepared in response to
requests by Senator Edmund S. Muskie, Chairman of the Senate Budget
Committee, and Representative Thomas L. Ashley, Chairman of the
Task Force on Economic Policy of the House Budget Committee.
keeping with CBO's mandate to provide objective analysis, this
report offers no recommendations.
The principal author of the report was Helmut Wendel; other
members of CBO's Fiscal Analysis Division, Nancy Morawetz, Michael
Owen, Thyra Riley, Richard Stromberg, and Yolanda Kodrzycki, made
important contributions. June O'Neill and George Iden gave helpful
The manuscript was typed by Marsha L. Mottesheard and
edited by Patricia H. Johnston.

Alice M. Rivlin
August 1978







INTRODUCTION . . .......................










1977 PAYROLL TAX INCREASES.............


Employer Taxes
Employee Taxes

Estimated Effects of an Illustrative $10
Billion Increase in Social Security
T a x e s ...............................
Estimated Effects of the 1977 Social
Security Tax Increases ...............





Effects on S a v i n g .....................
Effects on Private Pension Plans . . . . .
Effects on Capital Intensity of


SOCIAL SECURITY TAXES .................
Rollbacks in Social Security Tax Increases
Cutting Other Taxes ...................
Concluding Remarks .....................















AND WAGE BASES ...........................


FUND F L O W S ..............................


SECURITY TAX INCREASES ...................








Late last year, the Social Security Amendments of 1977 became
These amendments will substantially increase payroll taxes
beginning in 1979, and thereby provide sufficient funds to keep the
social security system solvent over the next four decades or
so. The public's reaction to these additional increases in social
security tax burdens, which are especially large for persons
affected by the substantial upward increase in the taxable wage
base, led to a Congressional reexamination of the available al­
ternatives in early 1978. At about the same time, the President's
new budget advanced proposals for sizable cuts in personal and
business income taxes. The thought naturally occurred that, if the
tax cuts recommended by the President were advisable to achieve
national output and employment goals, then these goals could
perhaps also be advanced by rolling back a part of the new social
security tax increases.
A desire to preserve the self-financing
character of the social security trust funds, however, is a major
deterrent to action along these lines.
Within this setting, this paper mainly focuses on the channels
through which payroll taxes affect wages, prices, and economic
Attention is paid to differences that result from
changes in employee- versus employer-paid taxes.
Although previous research on the effects of payroll taxes on
wages, prices, and profits has produced a wide variety of results,
a number of investigators agree that a major part of employer taxes
becomes embedded in the current dollar costs of labor compensation.
By thus increasing production costs, these taxes also increase
There is some evidence that a smaller part of employer
taxes, perhaps in the area of one-fourth, is likely to diminish
direct wage payments after a period of time following a tax in­
Employee-paid payroll taxes, on the other hand, probably
have few cost-price effects, since they tend to reduce the takehome pay of employees much as personal income taxes do.
While a substantial passthrough of employer payroll taxes into
higher prices seems prevalent, it is also true that in the very
short run it may be difficult to change prices or wages rates.
Thus, for a short period of time profits may absorb the effects
of a change in employer taxes.
Later, when prices edge higher,


3 2 -9 4 7 0 - 78 - 2

a good part of the burden of the employer tax tends to be shifted
to consumers. Since there is a large area of overlap between
consumers and earners of wages and salaries, such a shifting of the
tax burden to consumers is similar in many respects to a cutback in
real wages. When the payroll tax is reduced, the opposite effects
are likely to occur, although in some situations there may be
institutional reasons that make it easier for firms to cut prices
than to increase them (regulated industries) or the other way
around (advertised brand prices).

Analysis of the 1977 Tax Increase
The Social Security Amendments of 1977 provided large in­
creases in social security revenues as well as some cutbacks in
benefit payments.
With benefits slightly diminished, on net, the
additional revenues serve to increase the assets in the social
security trust funds.
In this paper, the numerical estimates of
the impact of the 1977 tax changes on economic activity and price
levels, from 1979 to 1982, are based on the results of large-scale
econometric models. They represent a comparison with the situation
that might have evolved without the Social Security Amendments of
These data also can be used to compare current law with a
complete rollback of the 1977 tax provisions.
The estimates indicate that by 1982 the gross national product
(GNP) in 1972 dollars would be almost 1 percent larger if the 1977
tax increase were rolled back completely; employment would be some
0.5 million greater; and the GNP price deflator would be around
one-half of a percent less. Prior to 1982, these effects build up

Channels of Impact of Payroll Taxes
The employee and the employer share of the payroll tax are
estimated to have roughly similar effects in restricting the volume
of economic activity. The employee share directly reduces take-home
pay and hence household purchasing power. The effects of the
employer share are more diffuse and more complicated, but probably
similar in magnitude.
Through the increase in prices, this tax
reduces the purchasing power of consumers as well as of foreign and
government purchasers.
It is not clear how long the influence on
foreign trade and government budgets will last. Eventually,
exchange rate readjustments should offset the initial effects of
higher U.S. prices on trade. In the case of governments, the


reduced buying power of the budget can be offset later if legisla­
tures choose to restore the level of real government services
through larger current dollar appropriations. In addition to these
effects, the higher prices caused by an increase in the employer
tax will tend to tighten financial markets, push up interest rates,
and thus exert a negative effect on the various forms of capital
While differences stemming from the employee and the em­
ployer tax are important, another differentiation is between tax
increases from hikes in tax rates as compared with increases in
wage-base ceilings. Wage-base changes affect the better-paid
employees and those employers who use predominantly highly skilled
Tax rate changes, on the other hand, have their largest
effect on middle- and low-earning employees. If employees in
the various major income groups generally were to divide their
incomes in similar proportions between consumption and saving,
the overall consumption effects of changing the wage base rather
than the tax rate should not be far apart.
The study argues
that this is in fact the likely case, since the available data
suggest that long-run saving rates by major income classes are very
similar. 1/
Employers could be affected differently by changes in payroll
tax rates and wage base ceilings.
An increase in the tax rate
moves up employer costs for the lowest-paid workers in a way
similar to an increase in the minimum wage.
Employer wage costs
for employees with higher pay possibly can be negotiated downward
after a tax increase, but this is not permitted for those who work
at the minimum wage.
In the case of a large increase in the wage
base ceiling, employers may try to substitute lower-paid labor with
fewer skills for those highly paid workers whose tax payments have
gone up sharply.


An increase in wage bases normally leads to larger ultimate
pensions for affected taxpayers. Some economists believe that a
change in expected pensions would affect private saving, but
there is no clear evidence that it does.

Approaches to Offset the Increases in Payroll Taxes
The impact of the 1977 social security tax increases on the
general economy is widely considered to be unfavorable, even though
these taxes would fulfill their primary task of providing funds for
the social security trust funds.
Hence, there has been a search
for methods to offset, to some degree or another, the effects of
the 1977 Social Security Amendments. This paper does not attempt
to summarize the various proposals that have been considered.
Rather, the aim is limited to presenting hypothetical examples of
how different types of tax cuts would offset different aspects of
the payroll taxes.
The most direct way of dealing with the undesirable economic
effects of the 1977 payroll tax increases would be to roll the
taxes back and to finance a portion of social security by general
This approach, however, could begin to jeopardize the
contributory insurance concept of social security which is a valued
attribute of the system.
A way of maintaining the insurance character of the system in
those areas where it is most important would be to make a distinc­
tion between the various trust funds. 2/ In contrast to old age
and survivors' insurance, hospital insurance treats all those who
are eligible for medicare on an equal footing. The benefits, that
is, do not vary according to past earnings and past tax payments.
Hence, the self-supporting insurance approach may be less needed in
this area and use of general revenues may be less objectionable.
A quite different and completely hypothetical offset approach
would be general employment tax credits. If such tax credits were
to apply to all employment, they would be in many respects the
reverse of the employer share of the payroll tax. Since employment
tax credits, though of a highly specific type, are currently in
force, it seems pertinent to mention this aspect.
Carter's suggestion to eliminate the telephone excise tax and to
cut unemployment insurance payroll taxes would be another approach
that would concentrate on reducing cost and price pressures.


Social security payroll taxes finance old-age and survivors'
benefits, disability insurance, and medicare, each of which has
a separate trust fund.

The offset possibilities that have been mentioned would
increase purchasing power in the private economy, while also
providing incentives to reduce costs and to moderate price pres­
A cut in personal income taxes, on the other hand, would
boost household purchasing power, but could not be expected to
counteract the upward pressure on prices exerted by higher payroll
The effects of cuts in direct business taxes, such as
recommended in the Fiscal Year 1979 Budget, would be somewhat more
uncertain. Business tax effects on economic activity and business
investment are likely to develop more slowly than in the case of a
tax that changes personal disposable income.

Long-Run Effects
In general, the study discusses the effects of social security
taxes in a time framework of a few years ahead. There is also some
consideration, however, of the long-run effects of social security
tax increases with benefit levels assumed to be unchanged. The
long- and short-run tax effects are different for several reasons.
It is unlikely that the level of social security taxes would
greatly affect the extent of economic activity and the rate of
inflation over a long period. Such effects are mainly of a shortrun nature, since after a number of years the private economy
and fiscal and monetary policies have time to adjust to these
taxes. After this adjustment process, the inflation rate is likely
to be unaffected but the price level would remain permanently
Some economists expect lasting effects on the saving rate from
a change in social security flows, especially so if the public
expected a change in social security benefits.
These economists
believe that the improved old-age security provided by the social
security system should have lowered the personal saving rate, but
such a downward movement has in fact not occurred. The evidence on
a relationship between private saving and social security is not
impressive, since the personal saving rate has tended to be stable
during the last few decades despite the large expansion of social
Another, more convincing, concern is that employer
contributions to social security and to private pension plans can
compete with each other, and hence an expansion of social security
taxes can threaten the growth of the pension plan component of
private saving.

A further question is whether payroll taxes that increase
the cost of labor might lead to a substitution of capital for
While there are some incentives for business to move in
this direction, the overall effect— even in the long run— is
considered small. It is likely that workers in the main eventually
will pay for the bulk of social security costs by accepting a
reduced real wage, so that the ratio of labor to capital costs
should not be affected to a substantial extent.




This paper analyzes the effects of changes in social security
payroll taxes on total economic activity and on the levels of wages
and prices. 1/ Primary attention is focused on the channels
through which social security taxes affect the economy and on the
differences that result from changes in employee- versus employerpaid taxes.
Particular estimates of aggregate economic effects are dis­
cussed for the tax increases legislated in the Social Security
Amendments of 1977.
This legislation is described in Chapter II;
the estimates of its short-run economic effects and those of an
illustrative $10 billion tax increase are shown in Chapter IV.
Chapter III prepares the ground for these estimates by discussing
some of the previous empirical research on the effects of payroll
taxes on wages, prices, profits, and short-run saving behavior.
Two more topics are taken up after the evaluation of the
short-run aggregate effects of the 1977 amendments.
Chapter V
discuses some possible approaches to cushion or offset the un­
desirable byproducts of these tax increases. This chapter is
conceptual— it describes the differences between various pos­
sible offset measures, such as income tax cuts and employment
credits, but it does not take up such proposals that have been
under consideration in the Congress, a task that has been done
elsewhere. 2/
Finally, Chapter VI takes a look at the long-run
effects of changes in social security taxes on personal saving, and
private pension plans in particular, and on capital-labor ratios.

1/ Social security payroll taxes finance old-age and survivors1
benefits, disability insurance, and medicare.
compensation and railroad retirement are also financed through
payroll taxes, but the aggregate amounts of these taxes are
considerably smaller.
An analysis of the effects of these
other payroll taxes would have many other similarities with
that attempted here for social security taxes.

Congressional Budget Office, Comparison of the Impacts of a
Cut in the Hospital Insurance and Disability Insurance Payroll
Taxes With Those of the Administration's 1978 Tax Cut Proposal
(February 24, 1978).

Most of the increases in social security taxes prior to 1977
were designed to finance the growing volume of benefits and did
not seek an improvement in the assets of the social security
trust funds. 3/ The 1977 amendments, however, do seek a substan­
tial increase in trust fund assets for the simple reason that these
funds are starting to run out.
The aggregate economic analysis,
of course, would be quite different if the prospective tax in­
creases were approximately matched by projected benefit increases,
rather than primarily serving to increase trust fund assets.
If one assumes balance between tax increases and growth in benefit
payments, there is no immediate reason to think that the restric­
tive effects of higher payroll taxes should be greatly different in
size from the expansive effects of larger benefits.
considering that in recent years the social security funds were
moving more and more into deficit, the program in past years
probably has tended to add to aggregate demand rather than to
reduce it.
A chief concern of those who analyzed payroll taxes in recent
years was the distributional effects.
Payroll taxes were criti­
cized because they fall disproportionately on low-income earners.
The payroll tax is imposed only on income up to a ceiling (current­
ly $17,700), a ceiling that is also used as a cut-off point in
computing pension entitlements.
Because of the ceiling, higherincome families have tax-free income, and their tax advantage is
further reinforced since higher-income families are more likely to
receive interest, dividends, and rents— none of which is subject to
payroll taxes. The regressive character of social security taxes
was moderated through a provision in the Tax Reduction Act of
1975. Low-income earners with dependent children became entitled to
a refundable earned-income tax credit on wages and salaries up to
$8,000. With the earned-income credit, the Congress aimed to
provide a total or partial refund of social security taxes for
those workers.
Distributional questions of this kind will generally not be
discussed in this paper. Instead, the discussion is fairly closely
focused on effects on inflation and economic activity.
In this
analysis, monetary policy is assumed to be "neutral," that is,


Social security taxes are deposited in three trust funds: Old
Age and Survivors, Disability, and Health Insurance. Together,
they are abbreviated as 0ASDHI. Benefits are paid directly by
the trust funds.


to provide additional bank reserves through open market operations
according to an unchanged growth path. Monetary policy cannot be
expected to wipe out inflationary cost-push effects of payroll
taxes, since such a course of action might be too costly in terms
of reduced economic activity.


3 2 -9 4 7 0 - 7 8 - 3




In legislation enacted in December 1977, social security taxes
were increased in several steps, beginning with 1979.
These tax
increases consist of hikes in the payroll tax rate as well as in
the maximum wage base to which the tax rates are applied. While
there were also changes on the benefit side, their cost effects
over the next five years are projected to be small in comparison to
the tax increases.
In this study, the 1977 amendments will be
analyzed purely as a tax change, an approach that frequently would
be inappropriate for social security tax increases, because they
are often linked to the provision of larger benefits.
Social security tax provisions can usually be summarized in
terms of the payroll tax rate, which is applied to both the em­
ployer and the employee, and the wage base, with wages below the
ceiling subject to the tax and those above the ceiling exempt from
the tax. Table 1 shows the new tax rates and wage bases and com­
pares them to the former figures. It may be noted that, beginning
in 1981, the tax rate paid by self-employed individuals has been
set at 1.5 times the employee rate, a somewhat larger multiple than
recently used.
As Table 1 indicates, the new law begins to increase the tax
take in 1979 and causes a particularly large jump in taxes in
1981. These newly legislated increases are additional to the
provision of previous law that already had a rising tax rate
schedule as well as yearly advances in wage base ceilings designed
to keep social security revenues in pace with inflation.
Column (1) of Table 2 shows the annual additions to aggregate
payroll tax revenues estimated to result from these tax changes,
increasing from $6.6 billion in 1979 to $24.9 billion in 1982. The
data in this column would be substantially larger if the tax
increases scheduled under prior law were also included.




Payroll Tax Rate —

(in percents)



Law b/














Taxable Wage Base (in dollars)














These rates are levied on both employees and employers.
The rate for a self-employed person was 1.35 times the basic
rate in 1977, but will be increased to 1.5 times the basic rate
by 1981.


This schedule was in effect prior to the passage of the Social
Security Amendments of 1977 in December 1977.


Figures marked with an asterisk are subject to adjustment in
response to trends in wage levels.
The data shown here are
based on Social Security Administration assumptions regarding
inflation and productivity.
Figures without an asterisk are
specified by statute.



Trust Funds





Caused by
1977 Law


at End
of Year
















Less than $50 million.

NOTE: Past and Projected Changes in Total Trust Fund Balances: by
calendar years, in billions of dollars





(see Column
(see Column
(see Column
(see Column


focus was kept solely on the effects of the 1977 amendments for
two reasons:

The tax increases under the old law were smaller than
projected benefit increases and hence the net effect of the
social security system was to provide additional funds to
the public, rather than withdrawing them.



substantial wage base increases expected under the old
largely represented an indexation for wage inflation
thus should not have resulted in increased tax burden
wage earners relative to their real wages.

Column (2) of Table 2 shows that the 1977 amendments, on net,
are expected to diminish aggregate social security benefits some­
what. This diminution of benefits gradually increases and is
estimated by CBO to amount to some $3 billion by 1982.
By that
time, the main reason for smaller benefits is "decoupling,”
that is, a more straightforward formula to set initial pensions
in line with the purchasing power of wage levels. Prior law in­
cluded a formula for adjusting the dollar amount of retirement
benefits that substantially overcompensated for the effects
of inflation.
Decoupling refers to the correction of that unin­
tended generosity for those who retire in future years. Under the
new formulas, the basic real retirement benefit for the average
wage earner amounts to about 42 percent of eligible preretirement
The amendments, however, contain a number of smaller items
that increase the volume of benefits, notably a larger annual
income that may be earned without sacrificing social security
When Treasury accounts are consolidated, the tax and benefit
changes in the 1977 amendments will result in a smaller unified
budget deficit and in less borrowing from the public.
The re­
sultant reduction in interest payments to the public will be earned
by the social security trust funds because they will hold addi­
tional government securities as the funds grow.
The first three columns of Table 2— taxes, benefit reductions,
and interest— show the large additional flows of funds that are
expected to add to the trust funds.
Column (4) measures the


combined effect of the 1977 law on trust fund assets and thus also
indicates the direct reduction in the unified budget deficit caused
by this law.
Under prior law, the trust funds would have been in deficit
each year and the deficit would have grown larger over time,
reaching an annual amount of $9.8 billion in 1982. Under the new
law, however, the level of trust fund assets is projected to
increase, and substantially so in the early 1980s, with an ac­
cumulated surplus of $84.8 billion at the end of 1982. Trust fund
assets need to increase if they are to keep a constant ratio to the
volume of benefit payments.
The asset increases currently pro­
jected for the early 1980s, however, would do more than that, since
they would boost the ratio of assets to annual outgo.
This completes a brief description of some major features
of the 1977 Social Security Amendments.
In order to keep the
analysis within manageable size, the macroeconomic effects dis­
cussed in Chapter IV will cover only the impact of the tax in­
creases. The estimated effects on economic activity would be
somewhat larger if the benefit reductions had been taken into
These benefit reductions, just like tax increases, tend
to dampen economic actvity; but for the next few years they are
only about one-tenth the size of the tax increases.





Changes in payroll taxes, just like changes in other taxes,
affect both the general level of economic activity and the distri­
bution of national income among various economic units.
A major
issue in the debate about payroll taxes concerns the effects
on households versus businesses, that is, whether the shares of
total income between these groups are changed by the tax.
issue will be discussed initially without taking into account the
tax effects on overall economic activity.
Effects on total eco­
nomic output can be corrected by changes in other fiscal policies,
in monetary policies, or by recuperative tendencies in the private
economy. Distributional effects could be more lasting.
This chapter will deal with channels through which social
security taxes affect prices, wages and profits, while the next
chapter will incorporate effects on overall economic activity into
the analysis. In both chapters, unless stated otherwise, monetary
policy is assumed to remain relatively neutral, adding a prede­
termined amount of bank reserves in open market operations.
particular assumption provides sufficient money and credit so
that increases in production costs, caused by increased payroll
taxes, would push the general price level higher.
This process,
however, would also generate upward pressure on interest rates,
which would tend to result in dampened economic activity.
This chapter begins with an examination of the effects
of employer-paid taxes.
The analysis subsequently is extended to
employee payments. Finally, there is a discussion of the spending
and saving habits of those major income groups that need to be
distinguished to compare effects of wage-base changes with those of
payroll tax-rate changes.

There are three main ways in which employers could react to an
increase in their payroll taxes: (1) they could curtail their
profits; (2) they could roll back wage rates, or at least trim
normal increases in wage rates; and (3) they could raise prices.
Which of these actions predominates is likely to depend on the


3 2 -9 4 7 0 - 7 8 - 4

time span under consideration.
Initially, profits might be cur­
tailed, then prices might rise, and eventually real wages would
likely be reduced.
Further actions are also possible.
Employers could cut
back contributions to private pension plans as an alternative
to curtailing money wages.
If the payroll tax increases labor
costs relative to capital costs, employers might eventually try to
increase the intensity of capital.
To the extent that the tax
raises the effective minimum-wage cost, it could lead to the
laying off of marginal workers and cause an increase in structural
The major possible reactions— smaller profits,
lower wages, or higher prices— will be discussed in turn.

Curtailing Profits
Most economists do not expect a tax on labor, whether col­
lected from the worker or the employer, to reduce capital's longrun share in total income.
To arrive at this conclusion, it is
usually assumed that profits and wages are being maximized before
the imposition of the tax.
The tax makes labor input more ex­
pensive without changing labor productivity. Hence, labor is
likely to bear most of the burden of the tax, but exceptions could
occur if labor had abstained from fully utilizing its bargaining
powers prior to the imposition of the tax.
Another exception would occur if work behavior were changed
because of the burden of the tax. With a reduction in real wages,
some persons might be less inclined to hold a job, while others
might want to work more in order to maintain their former living
standards. Because of these opposing incentives, it is not clear
in which direction work effort might be affected by larger payroll
taxes; moreover, it is likely that changes in work behavior would
take a long time to develop. In general, a smaller supply of labor
tends to increase wages and reduce the rate of return to capital.
In this way, changes in work behavior could change the allocation
of the tax burden between labor and capital.
The theoretical expectations that long-run profit margins
are usually shielded from the payroll tax are consistent with


empirical findings. 1/ For the most part, investigators have
found that payroll taxes have no major effects on profits.
contrast, John Brittain did find a large degree of offset between
employer payroll taxes and real wages, to be discussed further
Given the big volatility of profits, payroll taxes could,
of course, have undetected effects on profit margins. Also, tempor­
ary effects on profits should be expected in the initial quarter or
so after a tax increase, because it can take time to announce price
changes, let alone to change wage policies, and in the meantime
profits may bear a major share of the adjustment.
Retrenchment of Wages
A payroll tax is likely to cause a retrenchment of real wages
in the long-run.
There is little dispute, for instance, that the
social security system tends to transfer income from those who work
to those who have retired or are disabled. The available empirical
evidence suggests that, in the long run, the real take-home pay of
workers is diminished by both the employer and the employee contri­
butions to social insurance.
As a test, John Brittain compared
real wages in manufacturing (and subindustries) across countries
with greatly differing payroll tax rates. Brittain measured the
relationship between wage disbursements and productivity (value
added per worker) in each particular industry, and he included
employer payroll taxes as a separate variable in this relationship:
"The finding is simply that, given the level of productivity
(value added per worker), the higher the employer tax rate,
the lower the basic wage rate by about the same amount." 2/
Brittain's results have been questioned because he did not take
into account the possibility that both wages and productivity could
have increased if the tax had an effect on the supply of labor


John A. Brittain, The Payroll Tax for Social Security (Washing­
ton, D.C.: The Brookings Institution, 1972), Chapter III; and
Wayne Vroman, "Employer Payroll Tax Incidence: Empirical Tests
with Cross-Country Data," in Public Finance, vol. 29, no. 2,
(The Hague: Public Finance/Finances Publiques, 1974), pp.


Ibid., p. 54.


or capital, and this could lead to a wrong interpretation of the
statistical findings. 3/ Brittain has expressed the opinion that
work behavior effects are probably minor, 4/ and CBO agrees with
that judgment, especially for a time span of a short number
of years.
Brittain also related wages and employer contributions to
value-added in U.S. industries from 1947 to 1965.
While the
results did not contradict the notion that the employer tax
diminishes real wages, the statistical relationships were not
significant in contrast to the results of the cross-country tests.
Brittain correctly notes that the small variance of the U.S. tax
rate over time makes a significant relationship unlikely.

Trimming Back Employer Contributions to Private Pension Plans
One way of retrenching wages, broadly defined, would be to
cut employer contributions for private pensions.
A few pension
plans provide that the employer may reduce his contribution to the
private plan whenever employer payroll taxes are increased.
most plans, however, provisions for integration with social secur­
ity are made on the benefit side only. 5/ For these plans, private
retirement benefits are reduced if social security benefits provide
an improved pension.
For these more prevalent plans, a rise in
social security taxes that is not accompanied by an increase in
benefits would not provide an automatic opportunity to reduce
employer contributions.
Any curtailing of employer contributions
would need to await new labor contract negotiations and the outcome
would depend on the parties' preferences for current or delayed


Martin S. Feldstein, "The Incidence of the Social Security
Payroll Tax: Comment," American Economic Review (September
1972), pp. 735-38.


John A. Brittain, "The Incidence of the Social Security Payroll
Tax: Reply," in Ibid., p. 742.


Dennis E. Logue, "How Social Security May Undermine the Private
Industrial Pension System," (Paper, Conference on Financing
Social Security, American Enterprise Institute for Public
Policy Research, October 1977).


Inflationary Impact of Employer Tax
Although there is general agreement that workers' pay, in the
long run, is diminished by payroll taxes, this sidesteps the
question to what extent employer payroll taxes induce cost-push
inflation in the short run. There are two different ways in which
the long-run wage retrenchment could proceed. One would be to give
employees smaller raises when their wages periodically come up for
review, in collective bargaining or otherwise, and to pay smaller
wages when employees are hired because of labor turnover.
other way would be for employers to increase prices. The resulting
inflation, unless fully compensated on the wage side, would tend to
reduce real wages and thus put much of the burden of the employer
payroll tax on employees. These effects have been studied by
Constance and Morton Schnabel:
While international cross-section analysis (presented by
John Brittain) is relevant to investigations of the
effects of payroll taxes on the long-run distribution of
incane, it cannot be’used in connection with projections
of short-run effects of payroll tax changes on near-term
price inflation.
For example, the long-run result that
labor pays all payroll taxes would be consistent either
with zero net effect on labor cost from payroll tax
change or with the failure of wage rate increases to
recoup price inflation associated with passing all
payroll taxes forward as price increases. 6/
This inflation would also have aggregate demand effects, but their
discussion will be postponed until the next chapter.
The distribution of burdens, of course, need not be fully the
same under these two alternatives.
Higher prices in the first
instance would affect all consumers, not only those who earn their
incomes from wages and salaries.
The distributional difference
between the case in which the tax burden falls on consumers versus
the case in which it falls only on employees is too elusive to be
picked up in a statistical test with available economic data.


Constance and Morton Schnabel (U.S. Departments of Labor and
Commerce, respectively), "The Short Run Incidence of Payroll
Taxes" (a paper presented at the Eastern Economic Association
Meeting, April 1978).


A direct test of the prevalence of passing employer payroll
taxes through in the form of price increases would involve employer
payroll tax rates as an independent variable in an equation that
explains prices.
Investigators have not been able to obtain
good results in such a test, however. Results are obscured since
most years in the last decades included tax increases, usually of
fairly small size. On the other hand, in years like 1966 and
1973, when large tax changes occurred, prices were accelerating for
other reasons.
The preferred test has concentrated on compensation per
This variable includes wage payments, fringe benefits,
and employer payroll taxes. If compensation tends to increase by
the same amount as an increase in the tax, it would seem that
employers incur the tax as an additional cost.
Presumably they
would revise prices upward accordingly; such a reaction to a cost
increase is suggested by the standard wage-price equations.
labor compensation, on the other hand, is found to increase by less
than the associated tax increase, then some of the tax apparently
is financed by a direct retrenchment of wages.
A number of in­
vestigators have tested this relationship. The findings differ
considerably, ranging from indications of major wage retrenchment
all the way to labor cost increases that exceed the employer tax
and thus also include a recoupment by workers of a part of the
employee tax.
Recent investigations, however, have shown a tend­
ency toward agreement. A frequent finding is that a major part of
employer taxes becomes embedded in the nominal costs of employee
compensation, but a smaller fraction, perhaps in the area of
one-fourth, diminishes wage payments directly.
Many of these tests are in the form of traditional wage
equations. Changes in compensation per manhour are represented to
depend on previous price changes, the unemployment rate, changes in
employer payroll tax rates, etc. In interpreting the influence of
the payroll tax on compensation, one may also allow for the impact
of the tax on prices and the subsequent effect of price changes on
A result obtained by Wayne Vroman suggests that after two to
three quarters, as much as one-fourth to perhaps one-half of
the employer tax is likely to be shifted backward, while the
remainder adds to employers' labor costs. If a choice has to
be made "between the two extreme hypotheses of no shifting and


complete backward shifting, the results were more favorable to the
former." 7/
The results of some other tests are cited in foot­
note 8.


Wayne Vroman, "Employer Payroll Taxes and Money Wage Behavior,"
Applied Economics, vol. 6 (September 1974), pp. 189-204.


Other tests along these lines were made by:
Constance and Morton Schnabel, ibid. About three-fourths
of the combined employer-employee tax is estimated to be
passed forward in price increases after a four-quarter inter­
George L. Perry, "Changing Labor Markets and Inflation,"
Brookings Papers on Economic Activity, 1970:3 (Washington: The
Brookings Institution).
About 70 percent of the combined
employer-employee tax is estimated to be passed forward after a
four-quarter interval.
Difficulties in obtaining sensible estimates are cited by
Robert J. Gordon, "Inflation in Recession and Recovery,"
Brookings Papers on Economic Activity, 1971:1, p. 122. This
quotation is included here to underscore the difficulty of
obtaining reliable statistical results in this area:
"In an initial attempt to explore this problem, I estimated
wage equations in which past values of the change in the
employer tax were included in addition to current values,
with their impacts estimated in a relatively unconstrained
way using the polonomial distributed lag technique.
results were not theoretically sensible.
The coefficients
indicated that, holding all other variables constant, in
the first year after an increase in the employer tax rate
the burden was more than shifted back to the employees,
while in the second and third years, wage increases were
higher than would have otherwise be expected and the burden
was shifted back to employers again."
Leon W. Taub, "Investigation of the Incidence of Taxes on Wages
in the United States," (New York: Chase Econometric Associates,
Inc., September 1977, unpublished).
Equations calculated by
Taub distinguish among major industries and suggest that the
inflationary effects of employer taxes are greater in the
highly unionized industries, like manufacturing, than in the
service sectors.

Rather than dealing with economy- or industry-wide wage
equations, some researchers have investigated microeconomic
data. An example is an investigation of individual wage and salary
earners by Hamermesh. 9/ Using data from a detailed sample study
of individual incomes, Hamermesh developed an equation that ex­
plains hourly earnings on the basis of schooling, location, type of
industry, and other such variables. To these equations he added a
payroll tax variable— dividing payroll tax payments by each indi­
vidual's actual earnings. This tax variable differs according to
the extent to which annual earnings exceeded the statutory wage
The sample was selected from adult white males in order
to have a large representation of persons who earn more than the
wage ceiling.
Hamermesh tested long-run results, allowing for a
seven-year adjustment process in his equations.
The results of several different formulations suggest that
somewhere from zero to one-third of the employer tax is borne by
labor in the form of lower wage rates following the adjustment
period. It is possible, of course, that Hamermesh's sample may be
flawed, since variations in the effective tax rate in his sample
largely depend on the wage-base ceiling and hence on employees'
income levels.
This could introduce biases because changes in
fringe benefits and in the supply of skills could also affect
income distributions.
In any case, Hamermesh's results from
microeconomic data are interesting and they are roughly similar to
some that have been cited for aggregative equations. Despite some
occasional statistical findings that wage rates are rolled back
within a few quarters of imposition of a payroll tax, most studies
do agree that the employer payroll tax, or at least a large part of
it, becomes an additional cost to employers.
Since prices closely reflect costs, even in the short run,
these studies imply that employer taxes push up prices, or at least
that a large fraction of these taxes do so.
Any such upward
price effect will became further magnified as workers subsequently
receive cost-of-living pay increases that push up prices even
To arrive at an overall judgment of long-run inflationary
consequences, one would also want to take into account effects


Daniel S. Hamermesh, "New Estimates of the Incidence of the
Payroll Tax," (Michigan State University, February 1978,


on aggregate economic activity.
Furthermore, one would need to
consider the likely fiscal and monetary policy reactions to unfold­
ing pressures on prices and economic activity.

Students of public finance generally agree that the burden of
a tax will eventually be distributed in the same way, whether the
tax is collected from the buyer or the seller in a market. A tax
on new automobiles, for example, should eventually have similar
effects, whether it is collected as a sales tax or as a manu­
facturers1 excise tax. By the same logic, the effects of employee
payroll taxes should be similar to those of employer taxes. In the
short run, the adjustment process to these taxes can be quite
different, however. The employer tax, as has been noted, is likely
to exert a push toward inflation, mainly because it is more diffi­
cult to adjust nominal wages downward than to move prices up. The
burden of the employee tax, however, is likely to be carried by the
employee right from the start, since it is institutionally diffi­
cult to renegotiate nominal wages upward simply because the tax has
increased. Sane researchers have obtained statistical results that
suggest that employees are able to recoup a moderate portion of
increases in the employee tax as well as in the personal income tax
in subsequent wage bargains. 10/
The evidence on this remains
quite tentative, however.

The preceding analysis has stressed the idea that the burden
of payroll taxes falls mainly on households. There is interest, of
course, in the distribution of such tax burdens by type of house­
hold. The wage base exempts annual earnings above the base from the
payroll tax.
Hence, an increase in the wage ceiling affects the
taxes of middle- and higher-income groups, while an increase in the
payroll tax rate has a proportionately larger effect on those with
earnings at or below the wage base.
To anyone following the


See, for example, Robert Gordon, op. cit., 1977:1, p. 121-22.

3 2 -9 4 7 0 - 7 8 - 5

intense Congressional debate about wage-base versus tax-rate
increases, it was clear that this choice was important.
consequences are involved in this choice:

There is a direct tax impact on various income groups.
Such analysis is not covered in the present study which
focuses primarily on aggregative economic effects.


There is an effect on the eventual size of an employee's
pension. Individual benefits are computed on the basis of a
weighted average of taxable wages prior to retirement.
Hence, raising the employee's wage base entitles the worker
with high earnings to more benefits after retirement,
and thus there is an eventual cost involved for the social
security trust funds that is not incurred in the case of a
simple hike in tax rates. While the rates of return on tax
payments generated by a higher wage base are smaller than
the average return for social security, a significant
return flow still is likely.
Benefit increases do not
ensue, however, when employers' wage bases alone are
singled out for an increase, as proposed in 1977 both by
the Administration and in the Senate social security bill.
Increases in the employer wage base do not generate
additional pension entitlements.


A shift in the tax burden between rich and poor taxpayers
could also affect the total size of consumer expenditures
and the volume of household saving.
Such results would
obtain, for example, if higher-paid individuals generally
were to save a larger percentage of additions to their
incomes than lower-paid persons.
This question will be
discussed further below.


Finally, there may be implications for the distribution of
employment opportunities among groups. Workers who receive
the minimum wage, for instance, cannot absorb the employer
share of the tax through lower wages and may have more
difficulty in finding a job as a consequence of an increase
in the payroll tax rate.


Consumption Effects of Changes in the Income Distribution
In the 1930s when Keynes developed his General Theory, 11/
it was taken for granted that rich households save a significantly
larger portion of additional incone than poorer households. This
notion has an intuitive appeal, but since World War II economists
have become inpressed by the difficulty of finding statistical
confirmation. 12/ Kuznets, for instance, found that over the
period from l869~”to 1929 the fraction of consumption to national
income had remained practically constant while income had quad­
rupled; 13/ and Goldsmith further strengthened such findings. 14/
This showed that, as the nation was becoming substantially richer,
it did not increase its saving rate. These findings, however, left
open the possibility that at any one moment those who receive
relatively high incomes might tend to have higher saving rates.
Friedman advanced a consumption theory maintaining that
persons who expect to receive large incomes for a number of years
would have no particular incentive to save a larger fraction of
their income than persons who expect to receive a small income for
a number of years. 15/ A sudden increase in income, however,
would tend to cause extra saving for a while, and a temporary
curtailment of income would have the opposite effect. The current


John Maynard Keynes, The General Theory of Employment, Inter­
est, and Money, (New York: Harcourt, Brace and Co., 1936).


For additional discussion of this subject, see Michael K.
Evans, Macroeconomic Activity, (New York: Harper and Row,
1969), Chapter 2.


Simon Kuznets, Uses of National Income in Peace and War (New
York: National Bureau of Economic Research [NBER], 1942),
p. 30.


A Study of Saving In the United States,
vol. 1 (Princeton, New Jersey: Princeton University Press for
NBER, 1955).


Milton Friedman, A Theory of the Consumption Function (Prince­
ton, New Jersey: Princeton University Press for NBER, 1957).


statistical evidence by and large supports Friedman’s notion that,
apart from effects of temporary blips in income, the underlying
saving rates by major income groups are similar.
For instance, Modigliani and Ando grouped house-owner house­
holds according to the value of their home; they computed the ratio
of consumption to income for these groups, and this ratio remained
stable as the home values increased. 16/ Households were classi­
fied according to the value of their homes because the hone tends
to reflect income status on a more permanent basis than any one
year's income.
Metcalf constructed a variable that showed the extent to which
incomes in the highest income decile exceed the median income.
Traditionally one would have expected increasing values for this
measure of income inequality to be associated with greater saving
rates. But, this "anticipated result does not occur." 17/
Alan Blinder extensively tested whether the income distribu­
tion affects consumption. He found that a move toward "equalizing
the incane distribution will either have no bearing on or (slight­
ly) reduce aggregate consumption." 18/ Several special reasons for
the latter, rather surprising, possibility are discussed in his
This general body of evidence suggests that an equal amount of
revenues obtained either by increasing payroll tax rates or by
hiking wage bases should have about the same aggregate effects on
consumption expenditures and on personal saving. This conclusion
is incorporated in the statistical analysis in the next chapter.


F. Modigliani and A. Ando, "The Permanent Income and the
Life-Cycle Hypothesis of Savings Behavior: Comparative Tests,"
I. Friend and R. James, eds., Consumption and Saving, vol.
II (Philadelphia: University of Pennsylvania Press, I960), pp.


Charles Metcalf, An Econometric Model of the Income Distribu­
tion (Chicago: Markham Publishing Company for University of
Wisconsin), p. 150.
In fact, Metcalf got some opposite
results from the traditionally expected direction, but the
interpretation of these results is open to question.


Alan Blinder, "Distribution Effects and the Aggregate Consump­
tion Functions," Journal of Political Economy (University of
Chicago Press, June 1975), pp. 447-75.


In general, increases in payroll taxes are expected to affect
saving because they curtail spendable incomes.
Social security
developments can also affect saving through another route.
increase in expected social security benefits could reduce the
provisions that a person may undertake on his own for old age.
This subject will be discussed in Chapter VI.

The Wage Base Effect on Employers
Employers could be affected differently by changes in the
payroll tax rate as compared with changes in the wage base. These
alternative revenue sources could affect the competitive situation
of firms that specialize in using high-wage labor— such as research
and consulting firms or electrical contractors— as against others
that specialize in low-wage labor. With an increase in the wagebase ceilings, costs for the firms that use highly skilled labor
would increase relative to costs for other firms. Relative employ­
ment levels in these industries might not change much, however, to
the extent that competition between the affected industries
is limited. This question is of special interest because some of
the proposals debated in 1977 call for very large increases in the
wage-base ceilings for employers only.
In the 1977 law, as en­
acted, wage bases continued to be treated identically for employers
and employees, but for both they are scheduled to increase con­
There is another way in which wage-base increases could have a
different impact from a tax-rate change.
An increase in the
tax rate increases labor costs in a fairly even manner for a large
number of firms. Since these increased costs are widely shared, it
should be less risky for firms to increase prices. In the case of
a rise in the wage-base ceilings, however, only the costs of
high-priced employees would be increased.
There might be pos­
sibilities of substituting lower-wage workers for those with higher
wages. Hence, a larger share of the increased costs might have to
be absorbed by highly skilled workers than would be expected for
workers in general in case of a tax rate increase. In the case of
an industry that is in close competition with foreign imports, it
is also more plausible to expect backward shifting of the employer
tax into reduced wages.
Despite these qualifications, it still appeared justified in
the next chapter not to make a distinction between the macroeco­
nomic effects of a change in the payroll tax rate and the wage-base





The purpose of this chapter is to evaluate the macroeconomic
effects of the social security tax increases legislated in December
Some problems immediately arise in such an undertaking.
To evaluate a tax change, one needs to compare the results
expected from that change with those that would have occurred
without the change. In the case of social security, a projection
without a tax increase encounters unusual consequences because the
social security trust funds would be depleted in a few years.
Some people would consider such a depletion similar to the
bankruptcy of a private firm, which would stop paying its obliga­
tions after such an event.
In this chapter, however, the assump­
tion will be made that social security benefits would continue to
be paid out of general funds after the trust funds become exhausted
and that consumer confidence would not be shaken by this sequence
of events.
By virtue of these assumptions, the 1977 law can be
analyzed as a fairly routine tax measure without evaluating the
economic effects that may ensue from its contribution to in­
creased stability of the social security system.
Some of the major questions that have to be faced in analyzing
the effects of social security taxes have been described in the
preceding chapter. The following conclusions were adopted for this

Employers tend to view a major part of their share of
social security taxes as costs that are passed forward
into prices;


Employees' take-home pay declines roughly by the amount
of their share of social security taxes.
In this sense,
employee payroll taxes have aggregate effects similar
to personal income taxes; and



Current knowledge does not permit one to make a distinction
between a hike in the payroll tax rate and an increase
in the wage-base ceiling for the purpose of estimating
aggregate economic effects, such as the change in consump­
These distinctions are important, however, for
analyzing effects on the distribution of household income
and on the competitive position of industries specializing
in high-wage or low-wage labor.

The judgments summarized above are also incorporated in
several of the large macroeconomic models of the United States.
Such models will tend to provide answers about the effects of
social security taxes that are consistent with the framework of
analysis adopted here. The discussion so far has dealt only with a
few key features of payroll taxes; the magnitude of effects of
payroll tax changes on economic activity, employment, and prices
has not been evaluated. This is attempted in Table 3, in which the
estimated reaction to an illustrative tax increase of $10 billion
is set forth.
This increase, either in employee or in employer
taxes, was chosen rather than an *actual tax change because the
effects of actual changes are complicated by the staggered intro­
duction of tax rate changes in successive years and by simultaneous
changes in employer and employee taxes. Panel A of Table 3 assumes
that only employee-paid taxes are increased by $10 billion, while
Panel B assumes that only employer-paid taxes are raised by this
same amount.
These illustrative changes are assumed to begin in
1979. Several aspects of the results deserve special note.

Effects on Real GNP
Whether employer or employee payroll taxes are increased, real
economic activity is shown to be affected in the same way— by a
decrease of $7 billion, $9 billion, and $5 billion (in 1972 dol­
lars) in the fourth, eighth, and twelfth quarters, respectively,
after the tax increase. This uniformity is a CBO assumption which
was made after carefully weighing the influence of several complex
The effects on real economic activity, caused by an


Quarters After Tax Change


$10 Billion Hike in Employee Taxes b/
Real GNP (billions of 1972 dollars)
Current Dollar GNP (billions of dollars)
GNP Price Deflator (percent)
Employment (thousands)
Unemployment Rate (percentage points)








$10 Billion Hike in Employer Taxes
Real GNP (billions of 1972 dollars)
Current Dollar GNP (billions of dollars)
GNP Price Deflator (percent)
Employment (thousands)
Unemployment Rate (percentage points)

Addendum for Change in GNP Price Deflator Under Different Assumptions


If Real GNP Effects Were Offset c/
Employee Tax Increase
Elnployer Tax Increase









Assumption C, but Less Passthrough of Cost Increase d/
Etaployee Tax
Employer Tax




CBO estimates based on CBO's Multipliers Model and Wharton Econo­
metric Forecasting Associates.

The illustrative policy changes in this table begin at the start of
1979. The estimates represent changes relative to the 1978 CBO five-year
Available estimates of the effects of a $10 billion reduction in benefit
payments would be similar to the figures for employee taxes,
For instance, an income tax cut could offset the real GNP effects of
a payroll tax increase,
Assumes that one-third of the employer tax is not shifted forward, but
paid out of profits and wages.
Profits would be affected initially
since they absorb short-run price shocks and wages would be scaled back
Less than one-half of one percent.

increase in employee taxes, were estimated on the basis of the
personal income tax effects in CBO's Multipliers Model. 1/ In this
case, economic activity would be restrained mainly as a result of
the cut in household disposable income.
For employer taxes, it was assumed that the effects on real
economic activity would be equivalent. In the employer-tax case,
real disposable personal income would also be curtailed because of
higher prices, but there are a number of additional channels of


Higher prices also could cause cutbacks of unit purchases
by governments, since both federal and state and local
budgets are formulated in current dollar values for nearterm periods.


An important consideration is that higher prices would be
likely to exert an upward push on interest rates, thereby
dampening investment and economic expansion generally. The
intensity of interest rate results would depend on the
conduct of monetary policy.



Higher domestic prices would encourage price-sensitive
imports and discourage exports.
These effects would
eventually tend to be counteracted by a slight weakening of
the dollar exchange rate.

In sum, employer tax increases would probably have a
smaller short-run impact on real consumption than employee
taxes, since the effects are less concentrated on dispos­
able income.
However, increases in employer taxes would
have larger downward effects on other components of GNP,
such as investment, net exports, and government purchases.
It seems plausible that the overall effects of these two
taxes might be about the same.

Congressional Budget Office, The CBO Multipliers Project,
Technical Analysis Paper, (August 1977).


Effects on Prices
The big difference in effects between employee and employer
taxes is in the behavior of prices. An increase in employee taxes
is expected to result in a slight moderation of price increases—
such as would be expected from the general dampening of economic
activity— and would decrease the GNP deflator by 0.1 and 0.2
percent by the eighth and twelfth quarters, respectively, after the
tax increase. This effect also operates for increases in employer
taxes, but it is expected to be swamped by the cost-push effect
of these taxes.
This impact was discussed at some length in
Chapter III. While no conclusive evidence was found on the portion
of employer taxes that is added to costs and prices, it seemed to
be a reasonable judgment that a sizable portion of the tax does
get added into prices.
Three different increases in the GNP price deflator are shown
in Table 3 in response to a hike in employer payroll taxes. The
largest increase— 0.7, 0.7, and 0.8 percent in the fourth, eighth,
and twelfth quarters, respectively— occurs when it is assumed that
other government policies are adopted to offset the curtailment in
economic activity that results from the tax increase (see Panel
C). A smaller price increase— 0.7, 0.6, and 0.5 percent occurs
without this assumption (see Panel B), and a more moderate price
increase— 0.5 percent for each quarter shown— results from the
assumption that one-third of the employer tax is not shifted
forward, but paid out of profits or wages (see Panel D).
The first of these price estimates (Panel C) was obtained from
a simulation using the Wharton Econometric Model. This model
incorporates a quick and fairly complete passthrough of increases
in employer taxes into prices.
In addition, the initial price
increases trigger further upward adjustments in wages and prices.
After several quarters, this ripple effect adds more than half
again as much to the price increase as the initial cost-push
effect. Monetary policy is assumed to be unaffected by these tax
increases, with an unchanging path of bank reserves directly
supplied by the Federal Reserve.
The alternative calculation, in which one-third of the em­
ployer tax is not shifted forward, assumes that initially after a
tax increase profits would decline, because it would take time in
some industries to edge prices higher.
Later on, there might be
some moderation in wage payments, as a number of empirical tests


As would be expected, the reaction of current dollar GNP to
these illustrative tax changes depends on changes in both prices
and economic activity. An increase in employee taxes reduces
current dollar GNP on both of these grounds— by $11, $19, and $17
billion in the three quarters shown (see Panel A).
But in the
case of an increase in employer taxes, current dollar GNP is
expected to rise— by $7, $1, and $6 billion, respectively— since
the price increases are estimated to dominate the outcome (see
Panel B).

The likely effects of the tax increases provided by the 1977
Social Security Amendments (see Tables 1 and 2) are shown in Table
4 for calendar years 1979-1982. To derive these estimates, the
main tasks were to combine the employee- and employer-share
effects of Table 3 into a single outcome and to take into account
that tax hikes are scheduled for each year, so that the effects
after 1979 combine first-year and subsequent-year changes.
The same sources and methods were used as in Table 3, with
special reliance on CBO's Multipliers Model and Wharton's econo­
metric model.
The results, of course, are uncertain, as must be
expected in this type of economic analysis.
The message of the estimated data in Table 4 is that the new
social security taxes will exert an increasingly restraining
effect on real economic activity between 1979 and 1982. The dampen­
ing effects of the large tax increases scheduled in 1981 are
particularly noticeable in 1981 and 1982. Real GNP is expected to
be 0.2 percent below baseline estimates in 1979, 0.5 percent in
1980, and as much as 0.9 percent in 1982. Similarly, the number of
jobs lost in 1979 is estimated to be around 100,000, rising to
about 500,000 in 1982. The corresponding increase in the unemploy­
ment rate is 0.3 percentage points in 1982.
Usually, events that restrain real economic activity would
have some dampening effect on inflationary pressures, since both
labor and product markets would be experiencing increased slack.
As already mentioned, such an effect cannot be expected from an
increase in social security taxes. Payroll taxes restrict purchas­
ing power but at the same time increase the costs of producing




















GNP Price Deflator





Current Dollar GNP
(billions of dollars)





Employment (thousands)









Additional Payroll Taxes
(billions of dollars)
Real GNP (billions of
1972 dollars)
Real GNP (percent

Unemployment Rate
(percentage points)

Addendum for Change in Price Deflator Under Different Assumptions


If Real GNP Effects
were Offset c/





Assumption I, but Less
Passthrough of Cost
Increase d/







Tax increases from Table 2; procedures to derive estimated effects from CBO's Multipliers Model and Wharton
Econometric Forecasting Associates.

These estimates represent changes relative to the 1978 CBO
five-year projections,
Less than $500 million.
For instance, an income tax cut could offset the real GNP
effects of the payroll tax increase,
Assumes that one third of the employer tax is not shifted
forward, but paid out of profits or wages.

goods and services.
Hence, decreased economic activity and in­
creased inflation should both be expected.
Table 4 shows an
increase in the general price level (measured by the GNP deflator),
amounting to 0.2 percent in the initial year of 1979 and growing to
0.5 percent by 1982.
The estimates for the effects on current dollar GNP show the
combined influence of curtailed economic activity— exerting a
downward influence— and higher prices— exerting an upward push.
The downward effect dominates, so that current dollar GNP is
estimated to be a bit smaller than it would have been otherwise,
decreasing $12 billion in 1982.
The lower half of Table 4 shows two additional estimates of
price impact.
In the first line, it is assumed that the negative
effect of the payroll tax on economic activity is cancelled
by other policies or events.
This could be achieved through an
income tax cut, through larger government spending, or through a
stronger private economy than had been previously anticipated.
Without a dampening of economic activity, the increased cost
effects of the larger payroll taxes would have an even greater
influence and especially so toward the end of the period when these
price effects would have had time to build up, with the GNP de­
flator increasing by 0.8 percent in 1982 (see Item I).
In the bottom line of Table 4 (Item II), it is assumed that
firms recapture only two-thirds of their increased tax costs by
increasing prices, whereas the remaining one-third is funded by a
curtailment of profits and by smaller wage increases than would
otherwise have occurred.
In contrast, the assumption in the main
part of the table is that employers pass on to consumers virtually
all the costs incurred by them in paying the new payroll taxes. As
expected, the new assumption would lead to smaller price increases.
The estimates in Table 4 indicate that the general economic
effects of the 1977 payroll tax increases are undesirable, whether
the focus is on real economic activity or on inflation.
beneficial effect, on the other hand, is a stronger social security
system. The budgetary goals of the tax increases are to boost the
reserves in the social security trust funds and to reduce the
unified budget deficit.
The Congress, of course, may decide to take action to offset
some of the economic effects of the increases in payroll taxes.
Such measures have been discussed in Congressional committees


and several bills for payroll tax relief have been introduced.
Relief action does not need to take the form of payroll tax roll­
backs. Policymakers could keep the social security tax legislation
as enacted and realign the rest of fiscal policy in terms of
the needs that would best satisfy general economic goals.
ministration proposals for income tax cuts in 1979, for instance,
partly represented an attempt to offset the dampening effects of
the social security tax increases.
Alternative ways of offsetting the effects of the payroll tax
increases are discussed in the next chapter.





The social security tax increases enacted in 1977 have three
particular consequences that have sparked the search for offsetting

The dampening effect on economic activity that is usually
exerted by a tax increase.


The inflationary effect exerted by payroll taxes because
they raise the costs of production.
(Estimates of the
magnitude of this and the above consequence are shown in
Table 4 in the preceding chapter.)


The surprisingly big payroll tax increases that will be
experienced by the segment of the population with earnings
above the previous wage ceilings, as illustated in Table
5. The tax changes include rapid and large increases in the
wage-base ceilings in addition to higher tax rates. Thus,
the amount of the prospective tax hike is quite large for
persons who are affected by both the tax rates and the
higher wage base. The increases stem from the provisions
of previous law as well as from the 1977 Social Security
According to the formulas that determine
benefits, the higher wage bases eventually should result in
larger pensions after retirement. Taxpayers, however, may
not appreciate the prospect of this eventual return flow.

The 1977 Amendments were passed with the knowledge that some
of their economic effects would be negative, but with a strong
feeling that the "self-supporting" nature of the social security
trust funds, which are maintained through earmarked payroll taxes,
is important to preserve. Proposals to offset the recently legis­
lated tax increases include rollbacks, with funds to be replaced
from general revenues, which clearly would serve to reverse the
economic effects of the recent legislation.
While such cuts






Increase in Employee
Tax from 1978

Single-Earner Income

Up to $17,700

Up to $14

$17,700 to $22,900

$14 to $333

$22,900 and over


in social security taxes could jeopardize the notion of a contri­
butory pension system, a middle-ground position could be taken
that under these proposals general funds would finance only por­
tions of social security benefits and a major part would continue
to be financed by earmarked payroll taxes.
Some proposals have dealt with this issue by drawing a
distinction between the various trust funds. The old age and
survivors fund, it is claimed, needs to be financed by earmarked
payroll taxes, because the size of pensions depends on the level of
previous incomes and the associated payment of payroll taxes. The
trust fund is justified in paying a higher-income worker a larger
pension than is received by a low-income worker, because the
higher-income worker and his employer contributed considerably more
in payroll taxes.
The justification for differences in entitle­
ments would be less clearly perceived if the pensions were financed
by general revenues. In the latter case, the question might arise:
who needs a large pension, rather than who is entitled to it.
The situation is different in the case of the hospital
insurance trust fund, since all who are entitled to medicare
services are provided with the same standard of financial support.
Thus, since hospital services are offered independently of the
particular size of past payroll tax contributions, the need for a
contributory trust fund is less than in the case of old age and
survivors insurance. The disability fund probably falls in between
these two cases. It provides income maintenance insurance against
a risk that can befall anyone; in this sense it resembles medical
As the term income maintenance implies, however,


compensation differs considerably according to the size of previous
income. Such insurance is not equivalent to old age pensions since
the need for old age pensions is not a question of risk, but almost
of certainty, and thus can be better prepared for.
Based on these distinctions, there are proposals to reduce the
1977 payroll tax increases by financing hospital insurance, and
sometimes also disability insurance, through general revenues.
Such a move would obviate those payroll taxes that are earmarked
for these funds.

Action to offset the effects of payroll tax increases can also
be taken by cutting taxes other than payroll taxes.
A merit
of this approach is that it leaves the self-financing character of
the trust funds intact, while promoting a tax revenue total that
may be more suitable for economic goals. Of course, such a measure
could not be expected to remove all of the undesirable effects
of payroll tax hikes, since the offsetting tax measure would have
its own characteristics and could not cancel out the effects of a
payroll hike in every area.
For instance, an income tax cut can
offset the short-run dampening effects on economic activity
that are engendered by a payroll tax increase. It cannot, however,
offset the inflationary effects of the payroll tax increase,
since a cut in income taxes does not reduce production costs while
an increase in payroll taxes tends to increase them.
This chapter will not consider the actual plans that have been
proposed to offset social security tax increases.
Some examples
will be given, however, that illustrate how different types of tax
cuts might work as offsets to an increase in payroll taxes. The
examples have been picked to show a diversity of results and not
because the particular instruments are the likely ones to be
used. The following instruments are discussed:

Employment tax credits;


Cuts in excise taxes and in unemployment insurance payroll


Personal income tax cuts; and


Cuts in direct business taxes.


Employment Tax Credits
A general employment tax credit in many respects is the
reverse of the employer share of the payroll tax. Thus, it would be
an effective method to offset some of the negative by-products of
an increase in the payroll tax.
An employment tax credit— not just for additional workers but
for existing workers as well— would widely reduce unit labor costs
and hence production costs, an effect that is not achieved by a
reduction in personal income taxes or in the corporate profits tax.
The latter action would improve business cash flows, but would not
reduce the costs of production.
Even for an employment tax credit, however, there would be
some technical difficulties in achieving an offset to the labor
cost increases of the payroll tax. Some firms, for instance, do not
have enough earnings to pay profits taxes and they might not be
able to take advantage of the credit.
In addition, the employer
share of the payroll tax is treated as a cost before profits taxes
are computed, while the tax credit is taken after tax liabilities
have been calculated.

Excise Taxes and Unemployment Insurance Payroll Taxes
The Administration's proposals in the 1979 federal budget
include recommendations to repeal the federal excise tax on tele­
phone services and to cut the rate paid by employers under the
federal unemployment insurance system from 0.7 percent to 0.5
percent. The tax reductions involved in these two recommendations
amount to $1.6 billion in fiscal year 1979 and $1.9 billion by
fiscal year 1980, thus offsetting only about one-fifth of the
near-term social security tax increases.
In general, tax measures of these types are worth considera­
tion as offsets to payroll tax increases, since they tend to add to
private purchasing power while exerting some anti-inflationary
effects. The federal unemployment insurance tax is a payroll tax
like the social security tax, but this tax is levied only on the
employers. The telephone excise tax tends to increase the price of
telephone service for households, businesses, and other users.
Opportunities to propose offsets along these lines, however,
are limited. All payroll tax receipts— whether OASDHI, unemploy­
ment, or railroad retirement taxes— flow into trust funds, so


that major efforts to reduce these taxes would encounter problems
similar to a rollback of social security taxes. If repeal of the
telephone service tax were accomplished, the excise taxes that
would remain all serve purposes besides revenue raising.
taxes are designed to discourage specific types of consumption,
such as alcohol, tobacco, and crude oil (an energy tax proposed by
the Administration).
Thus, the possibilities of substantial offsets by cutting
excise taxes or payroll taxes other than social security appear to
be quite limited. 1/

Personal Income Tax Cuts
The more the structure of a given tax differs from that of the
payroll tax, the more closely economic conditions and prevailing
monetary policy need to be examined to judge the effectiveness of
that tax as an offset. For instance, the greater the concern
about inflationary pressures, the less suitable would be a cut in
the income tax to offset a hike in the payroll tax, compared to
the types of instruments mentioned before. A cut in the income tax
tends to add further to inflationary pressures, and the more so the
closer the economy is to full capacity utilization.
In comparing the combined effects on economic activity of a
hike in payroll taxes and an equal-size cut in personal income
taxes, the following factors can be mentioned:


As was discussed in Chapter IV, changes in employee payroll
taxes can be considered roughly equivalent, from the
standpoint of macroeconomic effects, to changes in the
personal income taxes.
For this part of the payroll
tax, the income tax is an effective instrument of offset.

Some economists have proposed that the federal government
should compensate state and local governments to the extent
that they agree to reduce sales taxes. Such a course of action,
however, would be difficult to administer equitably.



Chapter IV also advanced the tentative judgment that the
effects on general economic activity of a given change in
personal income taxes (or employee payroll taxes) would be
about similar to that of employer payroll taxes. Specific
results would depend partly on monetary policy.
If, for
example, the monetary authorities did not accommodate
the price increases resulting from the payroll tax, then
this tax would turn out to be particularly restrictive
for economic activity. A cut in income taxes of equal size
might not fully offset these effects.


Specific estimates of the inflationary effects of an offset
policy using personal income taxes were included in
Tables 3 and 4. These tables showed inflationary effects
with and without a tax policy that offsets impacts on real


Effects on employment might not be offsetting if the
payroll tax— a tax on labor inputs— were to cause a substi­
tution of capital for labor. Such substitutions, however,
are expected to be minimal, as is discussed in the next
chapter of this study.

Cuts in Direct Taxes on Business
Economists are particularly uncertain about the size and
timing of the economic effects of changes in business taxes, such
as the corporate incane tax, integration of corporate and indi­
vidual incone taxes, the investment tax credit, and accelerated
depreciation of capital investment.
For this reason, only very
general remarks will be attempted:

A cut in the corporate incone tax has its immediate effect
on increasing after-tax profits, while an increase in
employer payroll contributions has an immediate impact of
raising production costs. Thus, the two tax actions do not
directly offset each other. Pronpt relief from the infla­
tionary impact of the payroll tax cannot be expected.


Over a number of years, business tax cuts that increase the
capital stock may increase productivity and thus may
contribute to reduced price pressures.



Business tax cuts tend to increase after-tax profits and
thus they add to business liquidity.
To the extent that
businesses do not pass on all of the cost impact of higher
payroll taxes in the form of price increases, their liquid­
ity is diminished by the payroll tax. Hence, there is the
possibility of some offset here between the two counter­
vailing tax effects.


Certain business tax cuts, namely the investment tax credit
and accelerated depreciation, provide a powerful and direct
stimulus to investment spending not available from cuts in
corporate profits tax rates. Over time, such incentives to
invest from these special instruments should more than
counteract any diminution of investment caused by a
payroll tax hike.


An increase of payroll taxes might also have some effect
toward a substitution of capital for labor.
Since the
employment of workers has become somewhat more expen­
sive through the hike of the payroll tax, employers may
look for ways to cut down on the use of labor.
process is not likely to go very far, however, since real
wages would tend to adjust downward in the long run.


Measures designed to affect investment spending are be­
lieved to operate with longer lags than measures that
stimulate consumer spending.

It may be useful to compare briefly various offset strategies.
A rollback of payroll tax increases is a highly effective method to
eliminate the negative consequences of these tax increases, but
this approach also eliminates the positive effects, such as the
maintenance of a trust fund that is solely financed by persons who
expect to become beneficiaries and by their employers. There is
also a problem with the design of a tax rollback. A rollback is
sometimes visualized as a general cut in payroll tax rates. This
would give only partial relief to those households whose tax
burdens are scheduled to increase sharply because of large upward
movements in the wage base.
A general employment tax credit, a cut in the employer federal
unemployment insurance tax, and reductions in excise taxes are
attractive ways to counteract the inflationary effects of the


social security tax increases.
The economic effects of these
instruments are more akin to those of the employer share of payroll
taxes than the employee share.
But these instruments are highly
specialized, they frequently serve purposes of their own, and they
may involve such small amounts of revenues that it would be
difficult to use them as the major element in an effort to offset
payroll taxes.
From the standpoint of general effects on economic activity,
personal income tax reductions are a good way to offset the unde­
sirable effects of payroll tax hikes. However, there obviously are
distributional problems in using this quite different tax structure
as an offset vehicle.
Federal workers, for instance, do not pay
social security taxes but they would benefit from the income tax
cut that is supposed to offset these taxes. Another serious diffi­
culty is that reductions in personal income taxes do not alleviate
the extra inflation caused by the hike in payroll taxes.
It is difficult to judge the efficiency of reductions in
business income taxes as a possible offset to payroll tax hikes.
Employer payroll taxes immediately change the costs of production,
while taxes on businesses' net income (and investment tax credits)
directly change the return on capital.
These taxes affect the
economy through rather different channels.




In the short run, the economy tends to adjust to an increase
in payroll taxes, holding other things constant, by reining in the
pace of economic activity and by pushing up prices. These effects,
however, need not continue for many years; in the long run, these
reactions are likely to fade as economic activity would be expected
to recuperate through market adjustments or through new government
The rate of inflation is also likely to return to its
previous path though the level of prices could be expected to
remain permanently higher.
This would follow if the Federal
Reserve increases the money supply somewhat more in response to the
initial cost-push price pressures, and does not subsequently
reverse this extra addition to the money supply.
The following aggregate effects may be particularly important
in the long run:

Effects of social security on household saving behavior;


Interactions between social security taxes and the growth
of private pension plans; and


Employer payroll taxes and the desired capital intensity
of production.

These effects are taken up briefly in this chapter.
addition, of course, there are many distributional aspects of
social security taxes, such as the transfer of income from those
who work to the aged, that are not dealt with in this study.

A number of economists believe that permanent increases in
social security benefits would tend to diminish private savings,


while increases in social security taxes— keeping benefits con­
stant— have only small effects on private saving. 1/ These pro­
positions are based on the belief that a chief motive for private
saving is to save for retirement.
When social security benefits
are expected to be larger, private households are said to respond
by saving less.
If social security taxes are increased and
no change in the benefit flow is expected, there is likely to be
only a small downward adjustment in long-run private savings,
because of the cut in disposable inccme.
To evaluate the total long-run effects of social security on
saving, government saving needs to be taken into account in
addition to private saving.
When social security benefits are
increased, both the private and the government sectors save less,
and this presumably has a large negative effect on national saving.
In the case of any tax increase, the government's position moves
toward surplus and some increase in total national saving is
likely. In the case of an equal increase in social security taxes
and benefits, government saving would stay unchanged, but private
saving presumably would decline because of the expectation of more
liberal benefits.
While this reasoning has plausibility, it implies that there
should have been a large downward push on the personal saving rate
over the 40 years since the inception of the social security
Benefit entitlements have increased greatly over this
The saving ratio has been constant, however, rather than
moving downward. 2/


See, for example, Alicia H. Munnell, The Future of Social
Security (Washington, D.C.: Brookings Institution, 1977),
Chapter 6; Martin Feldstein "Social Security, Induced Retire­
ment and Aggregate Capital Accumulation," Journal of Political
Economy, vol. 82:5 (September/October 1974), ppu 905-26; and
Martin Feldstein and Anthony Pellechis, "Social Security and
Household Wealth Accumulation: New Microecononetric Evidence,"
Discussion Paper No. 530, (Cambridge, Mass.: Harvard Institute
of Economic Research, January 1977)•


Alicia H. Munnell, The Effect of Social Security on Personal
Saving (Ballinger, 1974).


It is, of course, possible that the general constancy of the
saving ratio hides several offsetting pressures on saving.
example, the downward effect of anticipated social security bene­
fits could be cancelled by the upward effect of the increasing
number of years that people expect to spend in retirement.
latter effect tends to increase the perceived need for saving. A
longer period of retirement has been caused both by an increased
life expectancy and a shift toward earlier initial retirement,
partly engendered by provisions of the social security system.
The need for saving, of course, could also have been strengthened
by other factors.
Given the stability of the overall saving rate, there is no
firm evidence available so far that the existence and growth of
social security pensions has affected private saving.
At best,
there is scattered survey evidence that "employed men approaching
retirement (in the 55-57 age group) who did not expect benefits
saved more than those who did." 3/
The effects on saving could be different in the future, if the
average retirement age should be delayed because of elimination of
compulsory retirement. Any decline in saving would raise the
question of whether society is providing sufficiently for capital
formation. So far, however, the existence of a long-run effect of
social security on private saving is a matter of conjecture.

The relationship between changes in social security and
saving in private pension plans is a special case within the
previous topic. The two pension systems have been able to grow side
by side in the past, without crowding each other out. But, taking
a long view, their relationship is clearly competitive, one system
will grow faster at the expense of the other.
For example, many
private pension plans are specifically designed to complement the
pattern of social security benefits, so that additional social
security pensions will cause smaller payments of private benefits.
For such plans, an increase in the employee’s wage-base ceiling—
which ultimately assures increases in pensions to middle- and
upper-level employees— would eventually lead to slower asset
growth in private pensions.


Ronald B. Gold, "Tax Deductions for Individual Retirement
Saving," National Tax Journal (December 1972), pp. 585-93.


Another aspect of private pension plans is that employer
contributions are the mainstay of their revenues, even for those
funds that also receive employee contributions. When employers
experience an increase in their payroll taxes, they will naturally
consider whether it is possible to cut down contributions to
private pension funds and still maintain an overall retirement
system that the employees find acceptable.
It is far easier,
however, for employers to cut back on contributions to private
pension plans if there is an increase in social security benefits
than if there is an increase in payroll taxes without a benefit
A decrease in the growth of private pension plans would mean a
reduced flow of saving, particularly into the corporate bond and
stock markets. Other things being equal, this would reduce total
saving and thereby depress the rate of capital formation in the
long run.

Social security actions have short-run effects on private
investment by changing aggregate demand and by influencing interest
These effects were taken into account in the short-run
macroeconomic simulations of Chapter IV. The question posed here
is whether an increase in social security taxes, which might add to
employer labor costs, would make employers strive to substitute
capital for labor. To some extent, employers might undertake steps
in this direction.
After a long period, however, the burden of
payroll taxes— whether paid by the employer or the employee— is
probably mainly borne by labor, as was discussed in Chapter III.
Under such an outcome, incentives to change the capital-labor ratio
would fade out.
There are three exceptions to such neutral eventual outcomes
for capital-labor ratios. One is that social security provisions
may affect the supply of saving as discussed earlier in this
chapter. Capital formation, of course, is dependent on the incen­
tives for saving at times when the economy is reasonably fully
Another exception occurs if the supply of labor is responsive
to the changes in take-home pay caused by social security taxes.
The increase in taxes makes it less remunerative to hold a job— and
thus some workers might withdraw from the labor force.
At the


same time, however, the fact that it has become more difficult to
maintain their standard of living might persuade other persons to
enter the labor force or to work longer hours. The net effects of
these two forces— the substitution and the income effect— is
difficult to judge.
If there should be a decrease in the labor
force, this would strengthen wages and tend to increase the
capital-labor ratio.
Thirdly, one would expect an increase in the capital-output
ratio if unskilled workers were replaced by a smaller number of
skilled workers. An increase in the payroll tax effectively raises
the minimum wage, since the employer has to pay at least the
statutory minimum wage plus the enployer contribution thereon.
Some jobs may be threatened by a substantial payroll tax increase,
if the productive contribution of some workers is considered
sufficiently marginal.
Skilled workers would be better protected
from such possible layoffs because they have more flexibility. If
necessary, they can accept a smaller wage, which the lowest-paid
workers cannot accept.
Moreover, for highly skilled workers
the increase in payroll taxes represents a smaller fraction of
their wage since some of their earnings are tax free. With high
payroll tax rates, then, there are some grounds to expect employers
to develop a somewhat greater preference for skilled workers. One
of the prominent features of the 1977 Social Security Amendments,
however, is the large increase in wage bases.
This actually
increases the employer’s cost of hiring a highly skilled worker by
a higher percentage than the cost increase for an unskilled worker.







Who Pays Social Security Taxes?
George F. Break, "Payroll Taxes," The Economics of Public
Finance, Essays by Alan Blinder, Robert Solow, George Break,
et. al., (Washington, D.C.: The Brookings Institution, 1974),
pp. 168-74.
John A. Brittain, The Payroll Tax for Social Security (Washing­
ton, D.C., The Brookings Institution, 1972).
Martin S. Feldstein, "The Incidence of the Social Security
Payroll Tax: Comment," and John A. Brittain, "Reply," American
Economic Review (September 1972), pp. 735-42.
Robert J. Gordon, "Inflation in Recession and Recovery,"
Brookings Papers on Economic Activity 1971:1, (Washington,
D.C.: The Brookings Institution).
Daniel S. Hamermesh, "New Estimates of the Incidence of the
Payroll Tax" (Michigan State University, February 1978,
George L. Perry, "Changing Labor Markets and Inflation,"
Brookings Papers on Economic Activity 1970:3, (Washington,
D.C.: The Brookings Institution).
Constance and Morton Schnabel (U.S. Departments of Labor and
Commerce, respectively), "The Short Run Incidence of Payroll
Taxes," (Paper presented at the Eastern Economic Association
Meeting, April 1978, Washington, D.C., unpublished).
Leon W. Taub, "Investigation of the Incidence of Taxes on
Wages in the United States (Chase Econometric Associates,
Inc., September 1977, unpublished).
Wayne Vroman, "Employer Payroll Taxes and Money Wage Be­
havior," Applied Economics, vol. 6 (September 1974), pp.
Wayne Vroman, "Employer Payroll Tax Incidence: Empirical Tests
with Cross-Country Data," Public Finance, vol. 29, no. 2 (The
Hague, 1974), pp. 184-200.



Effect of Income Distribution on Saving and Consumption
Alan Blinder, "Distribution Effects and the Aggregate Consump­
tion Functions," Journal of Political Economy (University of
Chicago Press, June 1975), pp. 447-75.
Michael K. Evans, Macroeconomic Activity (New York: Harper and
Row, 1969), Chapters 2 and 3.
Milton Friedman, A Theory of the Consumption Function (Prince­
ton, New Jersey: Princeton University Press for NBER, 1957).
Simon Kuznets, Uses of National Income in Peace and War (New
York: National Bureau Bureau of Economic Research, 1942).
Charles Metcalf, An Econometric Model of the Income Distribu­
tion (Chicago: Markham Publishing Company for the University of
F. Modigliani and A. Ando, "The Permanent Income and the
Life-Cycle Hypothesis of Savings Behavior: Comparative Tests,"
I. Friend and R. James, eds., Consumption and Saving, vol. II
(Philadelphia: University of Pennsylvania Press, i9 0
6 ).


Effect of Social Security System on the Saving Rate
Martin Feldstein, "Social Security, Induced Retirement and
Aggregate Capital Accumulation," Journal of Political Economy,
vol. 82:5 (September/October 1974), pp. 905-26.
Martin Feldstein and Anthony Pellechis, "Social Security and
Household Wealth Accumulation: New Microeconomic Evidence,"
Discussion Paper No. 530, (Cambridge, Massachusetts: Harvard
Institute of Economic Research, January 1977).
Ronald B. Gold, "Tax Deductions for Individual Retirement
Saving," National Tax Journal, December 1972, pp. 585-93.
Dennis E. Logue, "How Social Security May Undermine the Private
Industrial Pension System" (Conference on Financing Social
Security, American Enterprise Institute for Public Policy
Research, October 1977, unpublished).


Alicia H. Munnell, The Effect of Social Security on Personal
Saving (Ballinger Publishing Company, 1974).
Alicia H. Munnell, The Future of Social Security (Washington,
D.C.: The Brookings Institution, 1977).



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