The Benefits to Taxpayers from Increases in Students' Educational Attainment

By Stephen J. Carroll; Emre Erkut | Go to book overview

APPENDIX B
Estimating Tax Payments

Payroll Taxes
The Social Security and hospital insurance portion of Medicare are financed by taxes levied on individual earnings. Not every individual pays these taxes; only the employed pay. Therefore, estimations are made using a two-part model. The first step estimates with probit the likelihood of paying payroll tax, and the second step estimates with OLS the amount of payroll tax payment conditional on having positive earnings. Assumed payroll tax payment for every individual is calculated by applying the statutory payroll tax rates (Table 3.3) to individual earnings data in SIPP. The specific response variable in the OLS is the square root of assumed payroll tax payments for an approximately normal distribution.The independent variables are
a set of dummies indicating the level of educational attainment:
–less than high school graduate
– some college
– bachelor’s degree or more
age and age-squared
interactions between educational attainment variables and age variables
a set of race/ethnicity dummies for Asians, blacks, Hispanics, and Native Americans
a dummy for U.S.-born versus immigrant.

Age is included as quadratic to allow for nonlinear effects of age, particularly as relates to cumulative experience in the labor market. Further, age and education status are interacted to allow for the slope on educational attainment to vary with age.

In all regressions, the intercept refers to the reference case of U.S.-born, white individuals who graduated from high school.

We run separate models for men and women, consistent with human-capital models of labor market outcomes. The fact that there are only small subsamples prevents us from running models for groups based on race/ethnicity and place of birth.

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