Participation Tax Rates Research Articles

Optimal income taxation in unionized labor markets

This paper extends the Diamond (1980) model with labor unions to study optimal income taxation and to analyze whether unions can be desirable for income redistribution if income taxes are optimized. Unions bargain with firms over wages in each sector and firms unilaterally determine employment. Optimal unemployment benefits and optimal income taxes are lower in unionized labor markets. Unions raise the efficiency costs of income redistribution, because unemployment benefits and income taxes raise wage demands, and thereby generate involuntary unemployment. We show that unions are socially desirable only if they represent (low-income) workers whose participation is subsidized on a net basis. By creating implicit taxes on work, unions alleviate the labor-market distortions caused by income taxation. We empirically verify whether (i) participation tax rates are lower if unions are more powerful, and (ii) unions are desirable by compiling our own data set with union densities and participation tax rates for 18 sectors in 23 advanced countries. In line with our theoretical predictions, we find that participation tax rates are lower if unions are stronger. Moreover, the desirability condition for unions is never met empirically. Numerical simulations for the Netherlands confirm that unions are not desirable if income taxes are optimized and optimal participation taxes are lower if unions are stronger.

Removing Welfare Traps: Employment Responses in the Finnish Basic Income Experiment

This paper provides evidence that replacing minimum unemployment benefits with a basic income of equal size has minor employment effects at best. We examine an experiment in Finland in which 2,000 benefit recipients were randomized to receive a monthly basic income. The experiment lowered participation tax rates by 23 percentage points for full-time employment. Despite the considerable increase in work incentives, days in employment remained statistically unchanged in the first year of the experiment. Moreover, even though all job search requirements were waived, participation in reemployment services remained high. (JEL C93, H24, H53, I38, J64, J65)

Drivers of participation elasticities across Europe: gender or earner role within the household?

We compute participation tax rates across the EU and find that work disincentives inherent in tax–benefit systems largely depend on household composition and the individual’s earner role within the household. We then estimate participation elasticities using an IV group estimator that enables us to investigate the responsiveness of individuals to work incentives. We contribute to the literature on heterogeneous elasticities by providing estimates for breadwinners and secondary earners separately, according to their potential earnings. Our results show an average participation elasticity of 0.0–0.1 among breadwinners and 0.1–0.4 among secondary earners in the EU as well as a high degree of heterogeneity across countries.

Isplativost rada u Hrvatskoj i Sloveniji: analiza pomoću mikrosimulacijskog modela

WORK INCENTIVES IN CROATIA AND SLOVENIA: ANALYSIS USING MICROSIMULATION MODELS The paper analyzes the impact of the tax-benefit system on work incentives in Croatia and Slovenia. Unemployed and inactive persons and their hypothetical transitions to employment are considered. As the main indicator of work incentives, the participation tax rate (PTR) is estimated, as it represents a portion of additional income that is lost because taxes increase and benefits decrease in transition of a person from non-employment into employment. Unlike previous research, which was made for both countries on hypothetical data, in this paper for the first time the calculations and analysis of PTR are based on survey data, which for both countries gives a realistic picture of the situation in the field of work incentives. The analysis is carried out on data and the tax-benefit system for 2017, and the main tool used is EUROMOD, a tax-benefit microsimulation model for the EU countries. The results show that the average PTR in Croatia is of a moderate size of 31.3%, while in Slovenia it is 11.3 percentage points higher. People with higher number of dependent children and those with lower level of market income obtained by other household members are more likely to have a high PTR in both countries, and in Croatia people with only primary education will also have it. Key words: participation tax rate, work incentives, EUROMOD, Croatia, Slovenia

Drivers of Participation Elasticities across Europe: Gender or Earner Role within the Household?

We compute participation tax rates across the EU and find that work disincentives inherent in tax-benefit systems largely depend on household composition and the individual's earner role within the household. We then estimate participation elasticities using an IV Group estimator that enables us to investigate the responsiveness of individuals to work incentives. We contribute to the literature on heterogeneous elasticities by providing estimates for different socioeconomic groups by country, gender and earner role within the household. Our results show an average elasticity of 0.08 for men and of 0.14 for women as well as a high degree of heterogeneity across countries. The commonly cited difference in elasticities between men and women stems predominantly from the earner role of the individual within the household and nearly disappears once we control for this factor.

Removing Welfare Traps: Employment Responses in the Finnish Basic Income Experiment

This paper provides evidence that replacing minimum unemployment benefts with a basic income of equal size has minor employment effects at best. We examine an experiment in Finland in which 2,000 beneft recipients were randomized to receive a monthly basic income. The experiment lowered participation tax rates by 23pp for full-time employment. Despite the considerable increase in work incentives, days in employment remained statistically unchanged in the frst year of the experiment. Moreover, even though all job search requirements were waived, participation in reemployment services remained high.

Work Incentives at the Extensive and Intensive Margin in Europe: The Role of Taxes, Benefits and Population Characteristics

Tax and benefit systems play an important role in determining work incentives at both the extensive and the intensive margin of labour supply. The aim of this paper is to provide a comprehensive comparative analysis of work incentives in Europe. Our analysis makes use of microsimulation techniques and representative household surveys from all 27 EU countries and the UK to compare the distribution of short- and long-term participation tax rates and marginal effective tax rates across population subgroups. We focus on people currently in work and characterise the population facing low work incentives in each country. Our results highlight the large variation in the distribution of work incentives across European countries, explained not only by differences in the design of tax-benefit systems, but also by the characteristics of the labour force across countries. Unemployment insurance benefits contribute substantially to short-term participation tax rates and explain on average a 20 percentage point difference between work incentives of short- versus long-term unemployment. Our analysis further highlights the need to use microdata to study differences across countries in terms of the population subgroups facing low incentives to work with the aim to inform the policy debate on potential reforms to make work pay.

Optimal age‐dependent income taxation in a dynamic extensive model: The case for negative participation tax on young people

AbstractWe consider optimal age‐dependent income taxation in a dynamic model where the labor‐leisure choice is the extensive margin, each household faces idiosyncratic shocks to labor productivity and a pecuniary cost to work, and there is no insurance market against the shocks. We show that the well‐known property of the optimal participation tax rate in the static model continues to hold in our dynamic economy, that is, the participation tax rates for some income groups with low consumption are likely negative. In dynamic models, the optimal participation tax rate depends on age and on labor income. Our numerical simulations suggest that a negative participation tax should be restricted to young households.

Housing Benefits and Monetary Incentives to Work: Simulations for France

This paper characterizes the impact of housing benefits on monetary incentives to work in France both at the intensive and extensive margins. Effective marginal and participation tax rates are estimated using the 2011 enquete Revenus fiscaux et sociaux (ERFS, Insee) for employed childless singles with the TAXIPP microsimulation model and decomposed by tax and transfer instruments. Means-testing implies that a 1‑euro increase in gross labor earnings reduces housing benefits by 27 cents on average. Combined with reductions in other means-tested transfers (30 cents) and the payment of social contributions (21 cents) this translates into effective marginal tax rates close to 80%. Means-testing also induces a reduction in housing benefits upon taking a job which acts as a participation tax. Its magnitude depends on whether individuals receive unemployment benefits when out-of-work. Unemployment benefits increase overall participation tax rates by providing higher replacement earnings but decrease the participation tax linked to housing benefits by reducing the amounts of housing benefits received.

Les incitations monétaires au travail en France entre 1998 et 2014

This study looks at incentives to work in France, measured using effective marginal tax rates (at the intensive margin) and effective participation tax rates (at the extensive margin). These show the proportion of an increase in earned income captured by the tax‑benefit system, either because the taxes increase or because the benefits decrease. They are calculated using microsimulation based on the Insee survey Revenus fiscaux et sociaux. Between 1998 and 2014, incentives to work at the intensive margin rose for very low incomes, and then decrease as incomes rise. Incentives at the extensive margin rose in the first third of the distribution. The profile of the marginal rates changed from a U to a tilde shape. Incentives to work are lower for single people than for couples, but there is very little difference in incentive to work between men and women, except at the top of the distribution, to the detriment of married women.

Tax and transfer policies and the female labor supply in the EU

This study measures the effect of tax–benefit policies on female labor supply based on a broad sample of 26 European countries in 2005–2010. The tax–benefit microsimulation model EUROMOD is used to calculate a measure of work incentives at the extensive margin—the participation tax rate, which is then used as the main explanatory variable in a female employment equation. This allows me to deal with the endogeneity of income in a new way by using a simulated instrumental variable based on a fixed EU-wide sample of women. The results suggest that a 10 percentage point increase in the participation tax rate decreases the female employment probability by 2.5 percentage points. The effect is higher for single mothers, for women in the middle of the skills distribution, and in countries that have lower rates of female employment.

Patterns of welfare-to-employment transitions of Croatian Guaranteed Minimum Benefit recipients: a preliminary study

In this paper we explore the transitions of social assistance beneficiaries to employment in Croatia. Data was sourced from the social welfare register for 208 persons from the 2015 cohort of new, unemployed social assistance recipients in one Centre for Social Welfare, their outcomes tracked until June 2017. About a quarter of the recipients became employed within one year, in most cases with wages slightly higher than the statutory minimum. Out of them, about a quarter relapsed into social assistance status within a year. Following the World Bank Employment Barriers approach, we examine whether outcomes are associated with disincentives to work (inactivity trap), lack of work-related capabilities, or gendered engagement with in- household work. We found the average participation tax rate (PTR) for recipients to stand at 57%, yet no effect of PTR, benefit level, debt or PTR level on transition to employment was identified. With respect to capabilities, the role of human capital (vocational in particular), work experience and age turned out to be consistent with prior research. Substitution of inhouse work is consistent with the finding that women are less likely to get employed if living in a household with dependents.

Short- and long-term participation tax rates and their impact on labor supply

Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993–2010, we find that recent reforms in Germany increased work incentives at the extensive margin measured by the participation tax rate (PTR), particularly for low-income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the probability of taking up work significantly.

Estimating Participation Responses Using Transfer Program Reform

In this paper we estimate labor force participation responses for married women in Sweden using population-wide register data and detailed information about individuals' budget sets. For identification we exploit a reform in the system for housing allowances in 1997 which affected participation tax rates for households with/without children differently. Using a simple theoretical framework we provide a structural interpretation of our estimates and highlight how the employment response depends on the employment level. Our central estimate of the participation elasticity is 0.13. When splitting the treated sample into four quartiles based on the wife's skill level we find that the participation elasticity is more than twice as large for the lowest-skill sample than for the highest-skill sample.

The Effect of the UK Coalition Government's Tax and Benefit Changes on Household Incomes and Work Incentives

AbstractThe coalition government that was in office in the UK between May 2010 and May 2015 introduced a sizeable package of tax and benefit reforms to reduce the UK's large budget deficit. We use a microsimulation model that includes a broader range of policy measures than previous studies to estimate how these reforms affected both household incomes and work incentives. We find that lower‐income working‐age households and the very richest have lost the most, while working‐age households without children in the upper‐middle of the income distribution actually gained from these reforms. Some results of our analysis are, however, highly sensitive to the choice of ‘no reform’ baseline. This is particularly true of how much pensioners have gained or lost from the reforms, since this depends critically on whether the basic state pension is increased in line with earnings or prices in the ‘no reform’ scenario. When analysing the impact of these reforms on individuals’ work incentives, we find that the coalition's changes have slightly strengthened work incentives. The participation tax rate has, on average, been reduced by 3 percentage points, perhaps a less significant strengthening of incentives than might have been expected given the scale of the coalition's benefit cuts. However, this average effect disguises considerable variation across the population; indeed, the majority of workers have seen the incentive to increase their earnings weaken, not strengthen, as a result of the coalition's reforms.

Financial incentives to work in the context of a complex reform package and growing wages: the Polish experience 2005–2011

We examine the consequences of changes in work incentives in Poland between 2005 and 2011 resulting from a complex tax and benefit reform package and substantial real wage growth. While marginal and participation tax rates (PTRs) in the majority of analysed cases fall as a result of the introduced reforms, the conclusions from looking at replacement rates (RRs) for the population eligible for means tested benefits are generally different. These suggest that despite significant tax giveaways incentives on the labour market weakened for families with children and for those eligible to safety net benefits. Yet despite these negative policy implications, we show that work incentives improved substantially over the period due to significant real wage growth. When analysing the effect of the reforms on financial incentives to work, we often find conflicting conclusions when using the PTRs and RRs to reflect financial attractiveness of employment. This is not necessarily surprising, but serves as a note of caution on the use of each of them independently.

Tax and Transfer Policies and the Female Labor Supply in the EU

This study contributes to the female labor supply responsiveness literature by measuring the effect of tax-benefit policies on female labor supply based on a broad sample of 26 European countries in 2005-2010. The tax-benefit microsimulation model EUROMOD is used to calculate the measure of extensive margin work incentives - the participation tax rate, which is then used as the main explanatory variable in a female participation equation. This allows me to deal with the endogeneity of income in a new way by a simulated instrumental variable based on a fixed EU-wide sample of women. Results suggest that a 10 percentage point increase in the participation tax rate decreases the female employment probability by 2 percentage points. The effect is higher for single mothers, for women in the middle of the skills distribution, and in countries that have lower rates of female participation.

The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply

Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993-2010 we find that recent reforms in Germany increased work incentives at the extensive margin measured by the Participation Tax Rate (PTR), particularly for low-income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the likelihood of taking up work significantly.

The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply

Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993-2010 we find that recent reforms in Germany increased work incentives at the extensive margin measured by the Participation Tax Rate (PTR), particularly for low income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the likelihood of taking up work significantly.

The rise in female employment and the role of tax incentives. An empirical analysis of the Swedish individual tax reform of 1971

Sweden reached the 2009 OECD average level of female labor force participation already in 1974. Before 1971 spouses were taxed jointly. This meant that the wife’s financial gain of working was a function of the husband’s income. The higher income of the husband, the lower was the wife’s work incentive ceteris paribus. After the reform, the link between the husband’s income and the wife’s participation tax rate was, in principle, abolished. This paper exploits a rich longitudinal register data source and the large variation provided by the individual tax reform to analyze the evolution of female employment in Sweden in the years surrounding the 1971 reform. I provide clear evidence that employment grew considerably more among women married to high-income earners in the years following the announcement of the reform, especially among households with kids. Estimated participation elasticities are in the range 0.5–1 for the total sample.