Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2012:18: The effect of age-targeted tax credits on retirement behavior

Lisa Laun ()
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Lisa Laun: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: P O Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper analyzes the effect of two age-targeted policy initiatives to delay retirement that were simultaneously implemented in Sweden in 2007: an earned income tax credit and a payroll tax credit. Both policies were targeted at workers aged 65 or above at the beginning of the tax year. The paper exploits that the special rules for elderly were governed by the year of birth while the social security system is governed by age retirement,i.e., the day of birth, in analyzing the effect of the new policies. The results suggest that the age-targeted tax credits increased employment in the year following the 65th birthday by 1.5 percentage points among individuals with annual earnings above the 2007 tax liability threshold three to five years earlier. An analysis of fiscal implications indicates, however, that the increase in employment was not large enough to offset the implied decrease in tax revenues.

Keywords: Labor supply; retirement; earned income tax credit; payroll taxes

JEL-codes: H24; J14; J18; J21

53 pages, October 15, 2012

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