ifs social security reforms and incentives mike brewer and tom clark institute for fiscal studies...
TRANSCRIPT
![Page 1: IFS Social security reforms and incentives Mike Brewer and Tom Clark Institute for Fiscal Studies May 22 nd, 2002](https://reader030.vdocuments.us/reader030/viewer/2022032805/56649ef45503460f94c0719e/html5/thumbnails/1.jpg)
IFS
Social security reforms and incentives
Mike Brewer and Tom Clark
Institute for Fiscal Studies
May 22nd, 2002
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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!
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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 (???)
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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
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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
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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
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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
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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!
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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IFS
End
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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%