empirical evidence and tax reform - centraal planbureau · empirical evidence and tax reform ......
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© Institute for Fiscal Studies
Empirical Evidence and Tax Reform
Richard Blundell University College London and Institute for Fiscal Studies
Slide Presentation
MICSIM Workshop Den Haag
November 27th 2014
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• Focus here on the labour market, human capital and earnings tax reforms.
• Even before the recent crisis, governments around the EU faced pressure to increase employment and earnings.
• The current recession has added to pressure on government revenues.
• Ask two general questions: • What are the key margins where we might expect tax/welfare
reform to have most impact on earnings and employment growth? • How has this changed in the light of the great recession? 1. Develop an empirical foundation for tax design and reform. 2. Use the Mirrlees Review (2011) as a running example. 3. Overview of main issues and prospects with current tax systems.
Empirical Evidence and Tax Reform
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• Current systems remain unnecessarily complicated and induce too many people not to work or to work too li5le.
• Target work incen9ves where they are most effec9ve – our simula9ons show key increase in work/earnings,
– reducing means-‐tes9ng and improving the flows into work for lower educa9on mothers and maintaining work for those aged 55+.
• Integrate overlapping benefits -‐ a single integrated benefit – Mirrlees -‐ ‘ifs’ reforms.
• Reduce disincen9ves at key margins for the educated – enhancing working life9me and the career earnings profile,
– simula9ons show significant impact on human capital.
• Align tax rates at the margin across income sources – avoiding tax shiMing opportuni9es.
Summary overview...…
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• In this talk I draw loosely on four of my recent ‘post-Mirrlees’ studies: – ‘Labor Supply and the Extensive Margin’; AER 2011 – ‘Empirical Evidence and Tax Reform’; JEEA 2012 – ‘Hours of Work and the Optimal Taxation of Low Income
Families’; ReStud 2012 • Additional question: To what extent do dynamic ‘longer-run’
issues change our view of earnings tax reform? • Labour Supply, Human Capital and Welfare Reform’; NBER
2013
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• Overall question: How should we assemble the empirical foundations for tax policy design?
• Consider the role of evidence under five headings: 1. Key margins of adjustment to reform 2. Measurement of effective incentives 3. The importance of information and complexity 4. Evidence on the size of responses 5. Implications for policy design • Use these to build an empirically based agenda for reform
– > an efficient redesign of tax policy…. • What have we learned … so far? • Are the proposals still relevant post recession?
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• There are common key points in the life-‐cycle where individuals are likely to be most responsive to effec9ve tax and welfare incen9ves – Derives from compara9ve work across UK, US, FR and DE,
– Labour market entry, parents of younger children and older workers.
• Human capital on the job is strongly complementary with formal educa9on – Pay-‐off to on the job experience and training is low for those with lower
educa9onal qualifica9ons.
• Effec9ve tax rates can be extremely high for no good reason – Interac9ons of means-‐tested programmes at the bo5om and employer/
employee taxes /contribu9ons in the middle.
• Effec9ve budget constraints are complex and oMen poorly understood – Working age parents in France face the interac9on of more than 17 different
overlapping taxes, employer contribu9ons and benefits – only 13 in UK!
• Differen9al rates on similar sources of remunera9on induce significant tax shiMing and avoidance.
• Let’s take a run through the evidence….. The five steps….
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1. Key margins of adjustment to reform • A ‘descriptive’ analysis of the key aspects of observed
behaviour – not ‘causality’ just the correlations in the data, – the key facts!
• Where is it that individuals, families and firms most likely to respond? – e.g. the margins of labour market adjustment.
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Key margins of adjustment Employment for men by age – FR, UK, US & GER 2007
Blundell, Bozio, Laroque and Peichl (2014)
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Female Employment by age
Blundell, Bozio, Laroque and Peichl (2014)
and for women …..
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Female Hours by age
Blundell, Bozio, Laroque and Peichl (2014)
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Source: Blundell, Dias, Meghir and Shaw (2013)
1.6
1.8
22.
22.
42.
6lo
g w
age
20 30 40 50age
secondary further higher
Wage profiles by education and age – UK Women
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Women’s employment - UK
Source: Blundell, Dias, Meghir and Shaw (2013)
.5.6
.7.8
.91
empl
oym
ent r
ates
20 30 40 50age
All employment
0.0
5.1
.15
.2.2
5em
ploy
men
t rat
es20 30 40 50
age
Part−time employment
secondary further higher
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Women’s employment after childbirth - UK
Source: Blundell, Dias, Meghir and Shaw (2013)
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Summary so far…key facts
• A lifetime view of employment and hours – differences accentuated at particular ages and for particular
demographic groups, – higher attachment to the labor market for higher educated,
career length matters.
• Wages grow stronger and longer over the lifetime for higher educated – human capital accumulation during work is shown to be
complementary to education, – essential to explain employment and wage profiles for those
with more education.
• Other key facts include growth of top employment incomes and consequent impact on inequality.
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2. Measurement of effective incentives
• Precisely how do tax policies impact on the incentives facing the key players?
• e.g. overlapping taxes, tax credits and welfare benefits. – What are the ‘true’ effective tax rates on (labor) earnings?
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© Ins9tute for Fiscal Studies
Notes: wage £6.50/hr, 2 children, no other income, £80/wk rent. Ignores council tax and rebates
Budget Constraint for Single Parent: UK 2011
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
$22,000
$24,000
$26,000
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000
Net income (£/year)
Gross annual earnings
Current system
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Interactions matter: Budget Constraint for Single Parent in UK
Notes: wage £6.50/hr, 2 children, no other income, £80/wk rent. Ignores council tax and rebates
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© Ins9tute for Fiscal Studies
Source: Urban Institute (NTJ, Dec 2012). Notes: Value of tax and value transfer benefits for a single parent with two children.
Universally Available Tax and Transfer Benefits in US (Single Parent with Two Children, 2008)
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Average EMTRs for different family types: UK 2011 40
%50
%60
%70
%80
%
0 100 200 300 400 500 600 700 800 900 1000 1100 1200Employer cost (£/week)
Single, no children Lone parentPartner not working, no children Partner not working, childrenPartner working, no children Partner working, children
Mirrlees Review (2011)
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Average PTRs for different family types: UK 2011
Mirrlees Review (2011)
30%
40%
50%
60%
70%
0 100 200 300 400 500 600 700 800 900 1000 1100 1200Employer cost (£/week)
Single, no children Lone parentPartner not working, no children Partner not working, childrenPartner working, no children Partner working, children
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3. The importance of information and complexity
• How is the policy likely to be understood by the agents involved?
• For example, how ‘salient’ are the various tax and welfare benefit incentives? – ‘Take-up’ of welfare and tax credits among eligible families – ‘Bunching’ at kink points
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© Institute for Fiscal Studies
Variation in tax credit ‘take-up’ with value of entitlement 0
.2
.4
.6
.8
1 Pr
obab
ility
of t
ake-
up
0 50 100 150 200 WFTC entitlement (£/week, 2002 prices)
Lone parents Couples
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Budget Constraint for Single Parent: UK
Mirrlees Review (2011)
Notes: wage £6.50/hr, 2 children, no other income, £80/wk rent. Ignores council tax and rebates
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Are these hours rules salient? Single Women (aged 18-45) - 2002
Blundell and Shephard (2010)
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Hours’ distribution for lone parents, before WFTC
Blundell and Shephard (2010)
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Hours’ distribution for lone parents, after WFTC
Blundell and Shephard (2010)
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Bunching at Tax Kinks and the EITC One child families: US
© Ins9tute for Fiscal Studies
Source: Saez (2010)
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© Ins9tute for Fiscal Studies
Source: Urban Institute (NTJ, Dec 2012). Notes: Value of tax and value transfer benefits for a single parent with two children.
Universally Available Tax and Transfer Benefits in US (Single Parent with Two Children, 2008)
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© Ins9tute for Fiscal Studies
Source: Saez (2010)
Bunching at Tax Kinks and the EITC One child families: US
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Taxes on Higher Incomes Marginal tax rates by income level, UK
© Ins9tute for Fiscal Studies
0% 5%
10% 15% 20% 25% 30% 35% 40% 45%
$0 $10,000 $20,000 $30,000 $40,000 $50,000 Gross income
Earned income Self employment income Dividend income
Note: assumes dividend from company paying small companies’ rate. Includes income tax, employee and self-employed NICs and corporation tax.
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Bunching at the higher rate threshold, UK
© Ins9tute for Fiscal Studies
0
50000
100000
150000
200000
250000
300000
Num
ber in each £100 bin
Distance from threshold
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Composi9on of income around the higher rate tax threshold
© Ins9tute for Fiscal Studies
-‐$1 $0 $1 $2 $3 $4 $5 $6 $7 $8 $9
Total incom
e pe
r £10
0 bin (£ billion)
Distance from threshold
Interest
Property
Dividends
Other investment income Self employment
Other
Pensions
Benefits
Employment
Deductables
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4. Evidence on the size of responses
• This is where the rigorous econometric analysis of structure and causality comes into play.
• Eclec9c use of two approaches: 1. Quasi-‐experimental/RCT/reduced form evalua9ons of the
impact of (historic) reforms
• robust but limited in scope.
2. A ‘structural’ es9ma9on based on a the pay-‐offs and constraints faced by individuals and families
• comprehensive in scope and allow simula9on, but fragile.
• account for life-‐cycle facts, effec9ve tax rates, and salience/s9gma.
Ø What do we need to get observed responses to match with incen9ves?
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• Labour supply elas9ci9es vary in key ways by educa9on group, family type and age. No single number! – large at certain key points in the working life and for certain demographic
groups, this is where tax and welfare benefit distor9ons are important.
• Informa9on, s9gma and salience ma5er – dis9nguish large reforms that are well understood.
• Taxable income is responsive for self-‐employed and top earners – but oMen reflects tax shiMing and avoidance.
• Experience ma5ers: especially for those with above basic educa9on – and, it seems, only for those in full-‐9me employment,
– can explain ‘success’ of simpler simula9ons of reforms for low-‐wage workers.
• To match employment, hours and wages over the life-‐cycle it is key is to allow complementarity between human capital investments – between schooling and ‘on the job’ investments.
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Data and Simulations for Wages by education and age – UK Women, BHPS
Source: Blundell, Dias, Meghir and Shaw (2013)
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Data and Simulations for Women’s Employment - UK
Source: Blundell, Dias, Meghir and Shaw (2013)
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Younger Workers • Extensive margin responses are low (e≈.15) at young ages for college
educated – but much higher (≈.9) for mothers with basic educa9on & kids in 3-‐7 age range, and larger than intensive elas9ci9es which are more modest (≈.5)
– extensive/intensive elas9ci9es imply op9mal earned income tax credits,
– small human capital/experience effects for low educated so li5le progressivity but need to account for ‘take-‐up’.
Human capital effects
• Two forms of human capital – schooling and on-‐the-‐job investment – the hourly wages of those with more educa9on are higher, and grow faster and for longer into the working life -‐ formal educa9on complements experience capital,
– for educated young workers, unlikely to respond to tax incen9ves during career, rather effect career length and re9rement.
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Older workers… • Elas9ci9es increase for 60+ age group for both men and women
– appear to remain higher for women at both margins,
– elas9ci9es increase as mandatory re9rement restric9ons/earnings tests are liMed and actuarial fairness introduced,
– joint re9rement ma5ers above pure incen9ves.
• Lower educated are responsive to incen9ves in disability insurance, social security and medical insurance.
• Higher educated more responsive too at these ages
– larger density of workers around the work/no-‐work margin,
– wage and wealth effects become important.
• Response elas9ci9es are sizable but do not appear to explain all the recent rises in employment at older ages (e.g. in UK and US).
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Early re9rement and inac9vity by age and wealth quin9le UK: men
Note: Wealth quinBles are defined within each five-‐year age group. Source: Banks and Casanova (2003), based on sample of men from the 2002 English Longitudinal Study of Ageing.
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Taxable income…for top earners • Captures addi9onal avoidance and tax shiMing responses
– the ‘elas9city’ can be expected to fall as the tax base broadens • For a given tax base we can get an idea of the Laffer rate, the
revenue maximising top rate
– 1/[1 + taxable income elas9city (e) * Pareto parameter (a)]
– ‘a’ around 1.67 and ‘e’ around .45 for UK; Mirrlees (2011).
– ‘e’ reliable?, Ignore a variety of dynamic and structural issues.
0.0000
0.0000
0.0001
0.0010
0.0100
£100,000 £150,000 £200,000 £250,000 £300,000 £350,000 £400,000 £450,000 £500,000
Prob
abili
ty d
ensi
ty (l
og s
cale
)
Pareto distribution
Actual income distribution
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Some key messages emerge for reform: • First, it is important to take a‘life9me’view
– key points in the working life where tax incen9ves ma5er.
• Second, must account for interac9ons between taxes and welfare
– effec9ve tax rates depend on incen9ves in the welfare system, taxes on employers as much as in the personal tax system.
• Third, fixed costs, informa9on costs and s9gma are important
– responses at the extensive margin differ from intensive margin,
– take-‐up among eligibles is costly.
• Fourth, accoun9ng for human capital investment ma5ers
– educa9onal investments enhance human capital at work,
– incen9ves for educa9onal investments influenced by taxes.
• Finally, taxable income captures avoidance/shiMing opportuni9es.
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• Current systems remain unnecessarily complicated and induce too many people not to work or to work too li5le.
• Target work incen9ves where they are most effec9ve – simula9ons in Mirrlees (2011) show key increase in work/earnings
– reducing means-‐tes9ng and improving the flows into work for lower educa9on mothers and maintaining work for those aged 55+.
• Integrate overlapping benefits -‐ a single integrated benefit – Mirrlees (2011) -‐ ‘ifs’ and ‘universal credit’ reforms.
• Reduce disincen9ves at key margins for the educated – enhancing working life9me and the career earnings profile
– simula9ons in BDMS (2013) show significant effect on human capital.
• Align tax rates at the margin across income sources
Implications for efficient redesign of tax policy
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© Institute for Fiscal Studies
That’s All!
Empirical Evidence and Tax Reform
Richard Blundell University College London and Institute for Fiscal Studies
More details on website - http://www.ucl.ac.uk/~uctp39a/
MICSIM Workshop Den Haag
November 27th 2014
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© Institute for Fiscal Studies
Extra Slides
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Evidence since the financial crisis suggests • In general workers and families are ac9ng as if they expect a long-‐run
fall in rela9ve living standards
– evidence from consump9on and saving; and responses in labour supply.
• Capital investment and/or produc9vity have been slow to pick up
– employment for the young/low skilled may bounce back, but what of real wages and produc9vity?
• Appears the number of rou9ne jobs near the middle of the earnings distribu9on has declined steadily, at least in the UK and US
– more jobs are now professional or managerial.
• Suggests longer term earnings growth will mostly come from high-‐skilled occupa9ons, with some at the very bo5om.
• There remain the same key points where tax systems can be reformed that will also enhance earnings, employment and human capital.
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Prospects… • S9ll much to do in focussing on older workers in general, on return to
work for parents/mothers, and on entry into work.
• There are some poten9al big gains here,
– for example, as (higher skilled) women age in the workforce.
• Tax/welfare reforms to enhance earnings (from Mirrlees):
– refocus incen9ves towards transi9on to work, return to work for lower skilled mothers and on enhancing incen9ves among older workers.
• Human capital and ‘on the job’ wage/produc9vity complementarity
– note the poten9al importance of mismatch of entry skills in this recession.
• Produc9vity remains a key issue.