ifs social security reforms and incentives mike brewer and tom clark institute for fiscal studies...
TRANSCRIPT
IFS
Social security reforms and incentives
Mike Brewer and Tom Clark
Institute for Fiscal Studies
May 22nd, 2002
IFSMotivation
• Reforms changed incomes and incentives• Ever-present trade off when designing tax-
and-transfer system• This talk
– Asks how we should analyse changing incentives– Describes (not judges) the impact of Labour’s
changes– Work in progress –comments welcome!
IFSWhat sort of incentives?
• Incentives...– ...to work– ...to work more or earn more– ...to save– ...to claim benefits/tax credits (?)– ...to cohabit and marry (??)– ...to have children (???)
IFSEvaluating impact of incentives: a hierarchy
• “Optimal income tax” literature– “Are Labour’s reforms optimal?”
• Estimate response to incentives, predict changes due to reforms– Not saying whether “incentives” are good or bad
• Describe change in incentives– Not saying whether “incentives” are bad– Nor predicting their impact
IFSWork incentives
• Idea: trade off paid work against money• Summarising the impact of reforms
– Marginal effective tax rates– Replacement rates– Average tax rates
• Use tax and benefit model
IFSMarginal tax rates, workers
0 5,000,000 10,000,000 15,000,000
0%0-10%
10-20%20-30%30-40%40-50%50-60%60-70%70-80%80-90%
90-100%100%+
Before
After
IFSChange in marginal tax rates, workers
0 20 40 60 80
40%+ fall30-40% fall20-30% fall10-20% fall
0-10% fallNo change0-10% rise
10-20% rise20-30% rise30-40% rise
40%+rise
% of workers by family type
Children
Nochildren
IFSHow do marginal tax rates vary with earnings?
• Split earnings distribution into equal-sized cells– Calculate average marginal tax rate in each cell– Assume away extremes– X-axis not linear!
IFSMarginal tax rates and earnings, all workers
05
10152025303540455055
0 20 40 60 80 100
% of earnings distribution
Mar
gin
al t
ax r
ate,
%
Median, 97 Median, 03
Mean, 97 Mean, 03
IFSMarginal tax rates and hourly wage, all workers
05
10152025303540455055
0 20 40 60 80 100
% of wage distribution
Mar
gin
al t
ax r
ate,
%
Median, 97 Median, 03
Mean, 97 Mean, 03
IFSMarginal tax rates, earnings and children
05
10152025303540455055
0 20 40 60 80 100
% of earnings distribution, people without children
Mar
gin
al t
ax r
ate,
%
No kids, 97 No kids, 03
IFSMarginal tax rates, earnings and children
05
10152025303540455055
0 20 40 60 80 100
% of earnings distribution, people with children
Mar
gin
al t
ax r
ate,
%
Kids, 97 Kids, 03
IFSThe new tax credits and incentives
• New tax credits will change how families with children are means-tested
• For many families, awards based on past year’s income
• Income increases of under £2,500 will be ignored in the short-run
IFSIncentive to work at all
• Replacement rate– RR = [Income out-of-work / income in work]– Include partner’s income
• Average tax rate– What proportion of gross earnings is lost in tax and foregone
benefits and tax credits?
• Results– Almost no change for those without children!– Improves for lone parents– Worsens for couples with children
IFSMarginal tax rates, over 65s
0 1,000,000 2,000,000 3,000,000 4,000,000
0%0-10%
10-20%20-30%30-40%40-50%50-60%60-70%70-80%80-90%
90-100%100%+
Before
After
IFSChange in marginal tax rates, over 65
0 5 10 15 20 25
40%+ fall30-40% fall20-30% fall10-20% fall
0-10% fallNo change0-10% rise
10-20% rise20-30% rise30-40% rise
40%+rise
% of workers by family type
IFSOther incentives
• To partner– Not possible to have progressive tax, joint
assessment and neutrality to presence of partner– Difficult to quantify impact of reforms– Change compliance or behaviour?
• To have children– Considerably increased financial support for
children
IFSSupport for children, lone parent, 1 child
£0
£20
£40
£60
£80
£100
£120
0 20 40 60 80 100% of (gross) income distribution for lone parents with 1
child
Ch
ild s
up
po
rt, £
/wk
(med
ian
)
Before After
IFSSupport for children, couples, 2 children
£0£10£20£30£40£50£60£70£80£90
£100
0 20 40 60 80 100% of (gross) income distribution for couples with 2
children
Ch
ild s
up
po
rt, £
/wk
(med
ian
)
Before
After
IFSConclusions – so far!
• Work incentives– Little changed for those without children– For those with children, depends on whether
partner present and/or working– Remember “work” also means “increase earnings”
• Incentives to save for retirement complex• Incentives to partner, have children, claim
benefits altered, but hard to quantify
IFS
End
IFSWork incentives, families with children
RR, 40 hours
RR, 40 hours, after reform
ATR, 40 hours
ATR, 40 hours, after reform
Lone parent 68% 64% 61% 52%
Couple, working
55% 59% 31% 38%