The effective marginal tax rate on labor income under the social security payroll tax can be less than the statutory rate because additional earnings are associated with higher future benefits. This article develops a theoretical analysis of the determinants of the effective marginal tax rate for an unfunded social security system and applies the analysis to the U.S. system. It concludes that the effective marginal tax rate is only slightly lower than the statutory rate for most workers, except for those who retire in the start-up phase of the system.
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