IFS Social security reforms and incentives Mike Brewer
IFS Social security reforms and incentives Mike Brewer and Tom Clark Institute for Fiscal Studies May 22 nd, 2002
Motivation IFS • Reforms changed incomes and incentives • Ever-present trade off when designing taxand-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!
What sort of incentives? • Incentives. . . – – – . . . to work more or earn more. . . to save. . . to claim benefits/tax credits (? ). . . to cohabit and marry (? ? ). . . to have children (? ? ? ) IFS
Evaluating impact of incentives: a hierarchy IFS • “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
Work 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 IFS
Marginal tax rates, workers IFS
Change in marginal tax rates, workers IFS
How do marginal tax rates vary with earnings? IFS • Split earnings distribution into equal-sized cells – Calculate average marginal tax rate in each cell – Assume away extremes – X-axis not linear!
Marginal tax rates and earnings, all workers IFS
Marginal tax rates and hourly wage, all workers IFS
Marginal tax rates, earnings and children IFS
Marginal tax rates, earnings and children IFS
The new tax credits and incentives IFS • 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
Incentive to work at all IFS • 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
Marginal tax rates, over 65 s IFS
Change in marginal tax rates, over 65 IFS
Other incentives IFS • 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
Support for children, lone parent, 1 child IFS
Support for children, couples, 2 children IFS
Conclusions – so far! IFS • 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
IFS Work incentives, families with children RR, 40 hours, after reform ATR, 40 hours, after reform Lone parent 68% 64% 61% 52% Couple, working 59% 31% 38% 55%
- Slides: 22