Tax-benefit System Research Articles

Does the Czech Tax and Benefit System Contribute to One of Europe’s Lowest Levels of Relative Income Poverty and Inequality?

The Czech Republic is home to one of the more equal societies in terms of household disposable income, and has the lowest level of relative poverty in Europe. This study shows that Czech market income is quite egalitarian, especially when pensions are included. It finds that the narrowly defined tax-benefit system (i.e., direct taxes and social benefits) does not actually change the poverty rate, and that indirect taxes increase it. It further provides the first estimates of the redistributive effectiveness and targeting of a number of social and tax policies.

LAS LIMITACIONES DEL SISTEMA FISCAL MEXICANO EN LA REDUCCIÓN DE LA POBREZA: UNA MEDICIÓN PRO-POBRE

This paper performs an evaluation of the redistributive effect achieved through the tax-benefit system in Mexico, including the tax burden and conditional cash transfers for the poor and households in 2014. We answer the following question: What will the impact of the Mexican tax-benefit system be for the poor as well as its households? i.e, of pro-poor type? We conceive this analysis with an approach where the World Bank agrees, the pro-poor approach. In order to recognize if taxes and benefits can really compensate the poor and induce a reduction on relative and absolute poverty, we proceed with this novel measurement. Pre-fiscal income is built by comparing the tax burden and the distribution of benefits applied in both databases, the Encuesta Nacional de Ingresos y Gastos de los Hogares –enigh– and data from Método Integrado de la Medición de la Pobreza –mmip–. According to the equivalence scale of coneval as well as that from the mmip with their corresponding poverty lines, we proceed to develop a core set of recommendations for improving the tax system and its effect on the poor.

Redistributive Politics and the Tyranny of the Middle Class

The Netherlands has a unique tradition in which all major Dutch political parties provide CPB Netherlands Bureau for Economic Policy Analysis with highly detailed proposals for the tax benefit system in every national election. This information allows us to quantitatively measure the redistributive preferences of political parties. For each political party we calculate social welfare weights by income level using the inverse optimal-tax method. We find that all political parties roughly give a higher social welfare weight to the poor than to the rich. Furthermore, left-wing parties attach higher social welfare weights to the poor and lower social welfare weights to the rich than right-wing parties do. However, we also discover two anomalies. First, all political parties give a much higher social welfare weight to middle incomes than to the working and non-working poor. Second, all Dutch political parties attach a slightly negative social welfare weight to the rich by setting top rates beyond the revenue-maximizing ‘Laffer’ rate. Finally, we detect a strong political status quo, since social welfare weights of all political parties hardly deviate from the welfare weights that are implied by the pre-existing tax-benefit system. We argue that political-economy considerations are key in understanding the political status quo and why middle-income groups are able to lower their tax burdens at the expense of both the low- and high-income groups.

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.

Redistribution of Taxes and Benefits in Mexico: Evaluation of the 2014 Fiscal Reform on Households

We measured, for the first time, the general redistributive effect in the Mexican fiscal system with the Duclos-Jalbert-Araar decomposition approach, obtaining: vertical equity, horizonal inequity (HI) and reranking effect. The novelty of this application lies in the use of non-parametric techniques and the fact that we did not assume any functional relationship between the variables in our analysis. Our paper contributes with an assessment of the fiscal reform that took place in 2014 and compares it with the previous situation. A tax-benefit system with relative progressivity but high HI effect is found, as well as an increase on tax revenues up to 5.2 and 3.7 percent of GDP for income tax and VAT respectively.

Decomposing Income Polarization and Tax-Benefit Changes Across 31 European Countries and Europe Wide, 2004-2012

Polarization is an interesting additional social indicator for analyzing income inequality and poverty across countries, as it captures the phenomenon of ‘clustering around extreme poles’. Rising income polarization can be harmful since it is closely linked to poverty, social exclusion, social tension and social unrest (Brzezinski, 2013). However, so far little literature has been devoted to the changes in income polarization across countries over time, especially within Europe. Moreover, not much is known about whether and to what extent market income and the tax-transfer system contribute to changes of polarization. This paper provides theoretical and empirical insights into a relatively new dimension of income distribution: polarization. Rising income polarization has been observed outside Europe, but within the EU, polarization is relatively unexplored. We therefore broaden the analysis using micro-data from EU-SILC to 28 EU countries and 3 non-EU countries over the period 2004-2012. The paper estimates income polarization and decomposes the estimated polarization by country clusters, and Europe-wide, using a decomposition technique we developed. The main conclusions are: (1) Income polarization is rather stable over the decade in European countries, and Europe-wide. It was rising among West-EU15 countries in the sub-period 2004-2008, but declining afterwards. The opposite development is witnessed for CEE New Member States. Despite the Great Recession we do not find a sizeable increase in income polarization. (2) The causes of changes in polarization between 2004 and 2012 vary to a large extent across countries – no general pattern is found, although polarization was upward driven by market income (mainly capital income), while tax-benefit systems were polarization-reducing.

A Bird's Eye View on 20 Years of Tax-Benefit Reforms in Belgium

Belgium has seen major changes in its tax-benefit system over the past twenty years. These changes have, to a large extent, co-determined the evolution of disposable incomes of Belgian households on one hand, and their incentives to work on the other. In this paper we assess equity and efficiency aspects of changes in tax-benefit policies over the full course of 1992-2012. By simulating effects of current and past tax-benefit policies using the microsimulation model MEFISTO-EUROMOD, we summarize the shifts in policy orientation over this period using two summary measures of redistribution and work incentives.Our three main findings are: 1) the changes in the tax-benefit system have to a large extent been pro-poor, and redistribution has been increased; 2) the introduction of an earned income tax credit and the lowering of personal income taxes has contributed to improve work incentives, but this effect was partially eroded by an increase in unemployment benefits since 2000; 3) the results crucially depend on whether one chooses as ‘no policy change’ counterfactual indexation with inflation or indexation with nominal wage growth.

Distributional and Behavioral Effects of the Gender Wage Gap

The gender wage gap is a persistent labor market phenomenon. Most research focuses on the determinants of these wage differences. We contribute to this literature by exploring a different research question: if wages of women are systematically lower than male wages, what are the distributional consequences (disposable income) and what are the labor market effects (labor supply) of the wage gap? We demonstrate how the gender gap in gross hourly wages shows up in the distribution of disposable income of households. This requires taking into account the distribution of working hours as well as the tax-benefit system and other sources of household income. We present a methodological framework for deriving the gender wage gap in terms of disposable income which combines quantile decomposition, simulation techniques and structural labor supply estimation. This allows us to examine the implications of the gender wage gap for income inequality and working incentives. We illustrate our approach with an application to German data.

Between a risk society and a welfare state: social risk resilience and vulnerability to poverty in Lithuania

This paper looks into the role the tax-benefit system plays in mitigating widespread socio-economic risks and individual vulnerability to poverty. The drivers behind the changing role of the risk-mitigating social policies are analysed looking through the theoretical lenses of the risk society. The performance of the tax-benefit system in providing a safety net against income loss in cases of unemployment and childbirth is evaluated using the stress-testing approach proposed by Atkinson (2009). The method is applied on a Lithuanian case using the microsimulation model EUROMOD for a period of 2007-2012. The analysis suggests that the role of the welfare state shifts towards promotion of individual responsibility for risk management. The welfare state policies can produce substantially different levels of vulnerability to poverty among population groups facing different risks. In the context of the recent economic crisis in Lithuania, the protection provided by the welfare state declined, while the traditional mutual support among the household members played a major role in the risk management process.

Labour Force Participation and Tax-Benefit Systems: A Cross-Country Comparative Perspective

This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by divergence in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. We first replicate for Czech household-level data the labour supply estimation for Hungary presented in Benczur et al. (2014) and use the two perfectly comparable estimates to simulate how the aggregate participation rate would change in one country if the other country’s tax and social welfare system were adopted. Our estimation results yield similar labour supply elasticities for both countries, suggesting that individual preferences are essentially identical. The simulation results show that about one-half of the total difference in the participation rates of the 15–74 years old population can be explained by differences in the tax-benefit systems. The highest response is obtained for married women or women of childbearing age. This is related to the more generous maternity benefit system in place in Hungary as compared to the Czech Republic.

Making Work Pay: Increasing Labour Supply of Secondary Earners in Low Income Families with Children

In-work support through the tax-benefit system has proved to be an effective way of increasing labour supply of lone mothers and first earners in couples in a number of OECD countries. At the same time these instruments usually create negative employment incentives for secondary earners. This in turn reduces the potential of in-work support to address the joint objectives of higher employment and lower poverty levels. In this paper we present a simulation exercise to examine labour supply implications of a diverse set of possible reforms to the main elements of tax and benefit support of families with children. We set the analysis in the context of the Polish tax and benefit system and show how an adequate combination of increased generosity of support with the introduction of a double earner premium may result in increased labour supply of first and second earners in couples. The simulated reactions are concentrated in the lower half of the income distribution thus increasing the potential of in-work support to alleviate poverty.

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.

In-work benefits for married couples: an ex-ante evaluation of EITC and WTC policies in Italy

Abstract This paper investigates labor supply and redistributive effects of in-work benefits for Italian married couples using a tax-benefit microsimulation model and a multi-sectoral discrete choice model of labor supply. We consider in-work benefits based on the Earned Income Tax Credit (EITC) and the Working Tax Credit (WTC) existing in the US and the UK, respectively. The standard design of these income support mechanisms is however augmented with a premium for two-earner households to avoid potential disincentive effects on secondary earners. Revenue neutral policy simulations show that our reforms may greatly improve the current Italian tax-benefit system in terms of both incentive and redistributive effects. Furthermore, neglecting sector-specific attributes of the various job opportunities may lead to overstated estimates of the policy effects. JEL classification I38; H31; H53

A microsimulation approach to corporate disclosure policies

Purpose– The purpose of this paper is to present a formalisation of the “online transparency” concept in particular firms’ disclosures, employing basic microeconomics. Relevant literature from the accounting, economics and finance fields, along with specific documents regarding micro-simulation as a technique to capture diversity in data sets, is surveyed.Design/methodology/approach– A class of Stone-Geary utility functions is proposed as an analytical tool. A first simulation of public policies is introduced, exploring its impact on corporate firms and their preferences for online disclosure, specifically in Europe. Moreover, the author study corporate firm digital disclosure and compulsory disclosure policy specifically in Europe, exploring whether the size of the firm, country and sector of operation are relevant to explaining the differences in firms’ behaviour and whether these explanatory factors remain after the application of several types of policies.Findings– Quantitative policies, using this denomination to refer to those that directly affect the amounts of money dedicated to online disclosure, or its unitary costs, seem to have a less substantial effect than those that the author could call qualitative policies (stating minimum requirements for all companies or promoting broader scrutiny by means of internationalisation).Research limitations/implications– These last policies could also be less expensive for public agencies, as the quantitative ones should be supported by some kind of subsidy or tax benefit system. The paper contains certain mathematical assumptions that will need to be relaxed in further works.Originality/value– Finally, a full research agenda arises from this first attempt, from which both conceptual and methodological lessons can be learned.

From Housewives to Independent Earners: How the Tax System Can Help Women to Work in a Context of Strong Familialism

AbstractThe Southern European countries share a similar welfare system which does not perform well either in terms of equity or efficiency. Using EUROMOD, the EU-wide microsimulation model, this paper evaluates the enhancement of both the redistributive and the incentive effects of the Italian tax-benefit system by introducing either a family-based or an individual in-work benefit, financed through the abolition of the existing tax credit targeted at dependent adults. The results show an increase in the labour supply of women both in couples and lone mothers, in particular among the poorest, with important redistributive effects. The in-work benefits can contribute to the de-familialisation of the Mediterranean welfare states by reducing the reliance on the family and compensating the cost of services.

Progressivity of Taxes and Transfers: The Mexican Case 2012

The paper examines the redistributive effect achieved by the tax-benefit system in Mexico in 2012 using personal income tax, indirect taxes, social security contributions and social benefits. Our goal is to analyze progressivity of the fiscal system and go further to demonstrate how the different taxes and benefits contribute to the total redistribution effect. A set of popular tools of studying progressivity, such as the concentration curves and Kakwani progressivity index, are used. In addition, we propose an analytical method to decompose the total progressivity measured by the contributions of different taxes or benefits. We conclude that Mexican tax-benefit system is progressive, with greater pre-fiscal income inequality and high redistributive effect for some specific figures of transfers. The contribution from Vertical Equity (VE) is relatively important, but Horizontal Inequity (HI) lightens its impact. Income taxation does not contribute largely to VE. Further, some program benefits target unequally the deprived population, and then decreases the positive effect induced by VE.

Distributional Effects of a Minimum Wage in a Welfare State The Case of Germany

A popular argument for a federal minimum wage is that it will prevent in-work poverty and reduce income inequality. We examine this assertion for Germany, a welfare state with a relative generous means-tested social minimum and high marginal tax rates. Our analysis is based on a microsimulation model that accounts for the interactions between wages, the tax-benefit system and net incomes at the household level as well as employment and price effects on the distribution of incomes induced by the introduction of a minimum wage. We show that the impact of even a relatively high federal minimum wage on disposable incomes is small because low wage earners are scattered over the whole income distribution and wage increases would to a large extent be offset by reductions in means-tested welfare transfers and high marginal tax rates. Taking into account negative employment effects and increases in consumer prices induced by the minimum wage would wipe out any positive direct effects on net incomes of households affected by the minimum wage.

THE IMPACT OF THE EU CLIMATE POLICY ON GREEN JOBS CREATION

The term ‘green jobs’ can be referred to the employment in a narrowly defined set of industries (for example: energy, construction, transport, etc.), which provide environmental services or can be connected with a broader issue of the employment consequences. Most of the literature focuses on the direct employment. The potential impacts of green growth policies on the labour market situation tend to be overlooked. More attention also needs to be paid to how labour markets operate in different types of economy. There are many challenges, especially for the countries, which have built their industrial development strategies around the cheap carbon-based energy. The induced structural green change should be accompanied by active labour market policies. There are many difficulties connected with defining green economy, especially green employment. To determine the impact of green economic policy’s tools one requires a precise definition of green jobs. It is very difficult mainly because of many definitions of green jobs in the literature. This impact is not only direct but also indirect. A very important thing is also to determine the main factors, which influence the green employment in the main strategic sectors of the economy at a national and regional level.The main goal of this publication is to show the impact of climate policy on green employment in the EU countries. This will require precise defining of green jobs and to give the information about possible methods of this impact’s estimating. Main methods, which are adequate for estimating the impact of climate policy on green jobs’ creating were: the OECD ENV-Linkages model which is a recursive dynamic neo-classical general equilibrium model, dynamic approaches based on general equilibrium models (DSGE). There is also possibility to use indicators in the frameworks of taxonomic analysis (for example: Clark’s divergence coefficient, Euclidean distance, the measure of an angle and also chosen methods of objects’ grouping (for example: Ward’s method of grouping). Existing policies included in European Employment Strategy and the OECD Reassessed Jobs Strategy, provide the essential framework for successfully managing the structural labour market changes required to decouple production from harmful environmental effects. Priority ought to be given to: supporting the mobility of workers and reducing the adjustment costs created by displaced workers. supporting eco-innovation and their diffusion by strengthening initial education and vocational training, reforming the tax-benefit system for workers in order to ensure that cost pressures generated by environmental policies do not become a barrier to employment. Taking into account a regional and sector specific of the employment structure, we can formulate many interesting conclusions and advice for climate and economic policy makers.DOI: http://dx.doi.org/10.5755/j01.em.18.4.4498

Comparing Labor Supply Elasticities in Europe and the United States

Abstract We suggest the first large-scale international comparison of labor supply elasticities for 17 European countries and the United States using a harmonized empirical approach. We find that own-wage elasticities are relatively small and more uniform across countries than previously considered. Nonetheless, such differences do exist, and are found not to arise from different tax-benefit systems, wage/hour levels, or demographic compositions across countries, suggesting genuine differences in work preferences across countries. Furthermore, three other findings are consistent across countries: The extensive margin dominates the intensive margin; for singles, this leads to larger responses in low-income groups; and income elasticities are extremely small.