Promoting employment through welfare reform lessons from the past, prospects for the future

1
Promoting employment through welfare reform
lessons from the past, prospects for the future

• The Downing Lecture
• Alan Duncan
• University of Nottingham
• Institute for Fiscal Studies
• Melbourne Institute

2
Introduction and motivation

• National policy decisions are increasingly
  informed by international experiences and policy
  structures
• fiscal, welfare, family and labour policy,
  education, pensions etc..
• What lessons can be drawn from these
  experiences?
• Does a consensus emerge from international
  experiences of welfare reform?
• Can welfare policy be effectively transferred
  across institutions?
• How is the process of policy transfer
  characterised?
• What role is there for welfare policy in
  promoting employment?

3
Plan of lecture

• a short history of welfare reform
• concentrate on the detail of reform in US, UK and
  Australia
• draw out some themes common to recent welfare
  reforms elsewhere among OECD countries
• welfare policy ideas
• where do they come from? How do they evolve?
• international policy coordination and policy
  transfer
• policy ideas are shared, imported, adapted, or
  transferred across countries
• the global laboratory
• Case study Working Families Tax Credit in the UK

4
Plan of lecture

• key ideas and themes in welfare reform
• active labour market policies
• mutual obligation and conditionality of support
• promoting employment through tax credits
• an emerging consensus?
• simplification
• modularity
• transparency
• coherency

5
Plan of lecture

• where now for welfare policy in Australia?
• lessons for Australia
• lessons from Australia
• prospects for the future
• a missing pillar in Australian welfare support??
• potential for an employment tax credit (ETC) in
  Australia
• how might it be implemented?
• what effect on employment?
• a route to greater coherency?
• a route to further simplification?

6
Three pillars of welfare reform

• In October 1997, the incoming Labour Government
  committed to the following policy objectives
• to support families, to make work pay and to
  tackle child poverty
• These broad objectives informed many of the
  subsequent welfare and labour market reforms of
  the new government
• the Working Families Tax Credit
• Jobseekers Allowance
• the New Deals (for lone parents, young
  unemployed, disabled)
• Childcare Tax Credit

7
Three pillars of welfare reform

• Similar themes are replicated in policy
  statements throughout the developed world, with
  three over-riding objectives
• to provide support for low-income families
• to tackle child poverty
• to promote employment
• eg. ANTS (2000) in Australia
• eg. TRA (1986) and PRWORA (1996) in the US

8
The third pillar of welfare reform

• How to promote employment through welfare
  reform?
• What lessons emerge from recent welfare reforms
  around the world?
• Can one draw common themes from international
  experience?
• Can policy effectively be transferred across
  national institutions?
• Case studies 1) the EITC system in the US
• 2) the WFTC system in the UK

9
Case study tax credits and welfare policy

• Significant changes in UK welfare policy since
  1997
• employment- and demographic contingent benefits
  (WFTC)
• welfare-to-work programs (NewStart, JSA, Job
  Clubs, New Deals)
• Child Support Agency
• Many policy ideas were borrowed from
  experiences elsewhere
• From the United States EITC, workfare, New
  Deal, Child Support (CSES)
• From Australia JET, Child Support scheme,
  Working Nation

10
Welfare support in the US

• Key features of the current system
• support for low-income households (TANF, Food
  Stamps)
• assistance with childcare costs (Childcare
  subsidies)
• earnings-conditional credits (EITC)
• mutual obligation (time limitation, mandatory job
  search)
• set alongside state minimum wages
• Key characteristics
• systematic shift in caseload and cost from TANF
  (previously AFDC) to EITC
• TANF caseload halved through tight targetting and
  strong obligation on welfare recipients to secure
  employment
• criticisms that TANF infringes individual
  freedoms and citizenships

11
The US Earned Income Tax Credit (1975-)some
comparative structure

• EITC is a refundable tax credit delivering
  financial support to low-income working
  households
• Structure designed to promote employment
  incentives
• Credit phased in at a proportion of earned income
  to some maximum
• Credit phased out beyond some threshold income
• Current system differentiated by family type
• Creates three ranges phase-in, plateau,
  phase-out
• No minimum hours requirement
• How is EITC received?
• delivered as a refund by IRS through the annual
  tax return

12
Earned Income Tax Credit (after OBRA93)
13
Earned Income Tax Credit development over time,
2 or more children
14
Integration of EITC in the US tax systemFlorida
TANF structure
15
Welfare support in the UK

• Key features of the current system
• support for low-income households (Income
  Support, Jobseekers Allow)
• assistance with childcare costs (Childcare Tax
  Credit)
• earnings-conditional credits (Working Families
  Tax Credit)
• mutual obligation (New Deal, mandatory for some,
  Social Contract,)
• national minimum wages
• Key characteristics
• a change in emphasis, from unconditional income
  support to policies promoting employment
• part of an ongoing development towards a coherent
  and modular structure of welfare support
• WFTC development borrowed much from US experience
  of EITC

16
Welfare support in the UKsome history
Attitudes have changed the early view The
1944 Beveridge Report barely discusses the
problem of poverty among working households. In
this, it is very much a product of the particular
time at which it was written for Beveridge it
was axiomatic that anyone in employment had
resources sufficient to support a wife and one
child, Dilnot, Kay and Morris (1984,
p.23).
17
Welfare support in the UKsome history
Attitudes have changed the early view The
1944 Beveridge Report barely discusses the
problem of poverty among working households. In
this, it is very much a product of the particular
time at which it was written for Beveridge it
was axiomatic that anyone in employment had
resources sufficient to support a wife and one
child, Dilnot, Kay and Morris (1984,
p.23).
18
Welfare support in the UKsome history
Attitudes have changed the current view
..the Governments attack on worklessness
tackles the barriers to work faced by workless
households, including low skills, fears about the
time lag between benefits and wages, the perverse
incentives which discourage people from moving
from benefits to work and the lack of affordable
childcare A New Contract for Welfare -
DSS(1999, p.3).
19
Welfare support in the UKsome history
Attitudes have changed the current view
..the Governments attack on worklessness
tackles the barriers to work faced by workless
households, including low skills, fears about the
time lag between benefits and wages, the perverse
incentives which discourage people from moving
from benefits to work and the lack of affordable
childcare A New Contract for Welfare -
DSS(1999, p.3).
20
In-Work Benefits in the UKsome details

• Family Income Supplement (1971)
• the first explicit employment-contingent benefit
  in the United Kingdom
• available only to working families with children
• Family Credit (1988)
• aimed to improve work incentives relative to FIS
• More generous, assessed on net rather than gross
  income, eliminating high METRs
• Reforms to Family Credit (1992-1995)
• minimum eligibility criterion reduced from 24 to
  16 hours (1992)
• 10 extra once FC recipient worked 30 hours or
  more (1995)
• 60 childcare expenditure disregard in Family
  Credit (1995)

21
Family Income Supplement (1971)
22
Family Credit (1992)
23
The UK tax and transfer systemApril 1997
(uprated to 2000)
24
The Working Families Tax Credit (1999)some
structure

• WFTC represents a new tax-credit based system
  for delivering financial support to low-income
  working households
• differs from Family Credit in a number of
  respects
• increased credits for adults
• increased credits for children
• increase in threshold for maximum entitlement
  (applicable amount)
• reduction in credit withdrawal taper (70 to 55)
• a new childcare credit (70 of actual childcare
  costs, up to max of 150)
• also
• delivered through the tax code rather than via
  the Benefits Agency
• income taken into account in the assessment of
  housing and local tax benefits

25
Working Families Tax Credit (1999)basic credit
26
Working Families Tax Credit (1999)basic credit
27
Working Families Tax Credit (1999)basic credit
28
Working Families Tax Credit (1999)basic credit
29
Working Families Tax Credit (1999)basic credit
30
Integration of WFTC in the UK tax systemApril
2000
31
Effective income gain from WFTC receiptApril 2000
32
WFTC where did the idea come from?

• Although welfare policy is still dominated by
  national priorities and values, it is nonetheless
  true that domestic policy is informed by
  international experience
• globalisation of policy ideas
• increasing use of evidence-based policy
  initiatives
• international agencies to facilitate policy
  transfer
• What evidence is there regarding the effects and
  outcomes of the transfer of welfare policy?
• has it led to good policy?
• are there circumstances under which policy
  convergence doesnt work?
• Case study US-UK welfare reform

33
Policy Transfer

• Policy transfer reflects a situation whereby
• .. knowledge about policies, administrative
  arrangements, institutions and ideas in one
  political setting is used in the development of
  policies, administrative arrangements,
  institutions and ideas in another setting
• Dolowitz and Marsh (2000, p.5 )

34
The Working Families Tax Credit

• a case of policy transfer?
• I have therefore also asked Martin Taylor to
  consider at an early stage the advantages of
  introducing a new in-work tax credit for low-paid
  workers. It would draw upon the successful
  experience of the American earned income tax
  credit, which helps reduce in-work poverty, and
  now helps 19 million lower-paid workers in
  America.
• Rt Hon Gordon Brown MP (Chancellor), Budget
  Speech, 2nd July 1997

35
Time-line of welfare reform in UK US
US
UK
 
36
Time-line of welfare reform in UK US
US
UK
 
37
Time-line of welfare reform in UK US
US
UK
pilot study announced to extend FC-type system to
childless households
 
38
Issues in the move to tax credits in the UK

• policy transfer has been voluntary
• transfer pre-conditioned on common values
  ideologies in UK and US
• policy transfer has been partial
• Lessons have been drawn from US experience
• WFTC retains payment structure of FC rather than
  imported from EITC
• WFTC preserves the concept of independent
  taxation
• policy transfer has been adaptive
• WFTC delivered monthly through the tax code
  rather than annually as refund

39
Lesson-drawing and policy transfer

• lesson-drawing
• In America, the EITC is known for its
  administrative complexity, its weakness as an
  incentive provider and its proneness to fraud--it
  is the most fraud-prone benefit in the United
  States. . It would be a tragedy if, on top
  of its other problems, that problem were to
  afflict the WFTC as well.
•  
• Mr David Davis (MP for Haltemprice and Howden),
  16th February 2000.

40
Lesson-drawing and policy transfer

• lesson-drawing
• In America, the EITC is known for its
  administrative complexity, its weakness as an
  incentive provider and its proneness to fraud--it
  is the most fraud-prone benefit in the United
  States. . It would be a tragedy if, on top
  of its other problems, that problem were to
  afflict the WFTC as well.
•  
• Mr David Davis (MP for Haltemprice and Howden),
  16th February 2000.

41
adaptation in the transfer of policy

• policy adaptation
• the United Kingdom proposals were developed
  to be aligned with the pre-existing in-work
  benefit system rather than the tax credit system
  in the United States. For example, eligibility
  for the EITC was originally checked
  retrospectively, in line with the policy on tax
  measures. The IRS now verifies eligibility before
  payment. Such a process is built into the UK
  proposals because they are based on existing
  structures for in-work benefits.
•  
• Mr David Davis (MP for Haltemprice and Howden),
  23rd March 1998.

42
reverse policy transfer

• the transatlantic policy transfer loop
• The Working Families Tax Credit combines the
  best features of the UK's Family Credit and the
  US's Earned Income Tax Credit. The most
  impressive feature of this plan is that it
  achieves the advantages of paying benefits
  through the tax system without losing the many
  desirable features of Family Credit, and without
  sacrificing the simplicity of the UK tax system.
  . Initial indications are that the Labour
  government has taken a good programme and made it
  better.  
• Jeffrey Liebman (Harvard), 17rd March 1998.

43
reverse policy transfer

• the transatlantic policy transfer loop
• The Working Families Tax Credit combines the
  best features of the UK's Family Credit and the
  US's Earned Income Tax Credit. The most
  impressive feature of this plan is that it
  achieves the advantages of paying benefits
  through the tax system without losing the many
  desirable features of Family Credit, and without
  sacrificing the simplicity of the UK tax system.
  . Initial indications are that the Labour
  government has taken a good programme and made it
  better.  
• Jeffrey Liebman (Harvard), 17rd March 1998.

44
Welfare policy transfer in the UK

• So, has the policy transfer from the US led to
  good policy in the UK?
• generally, YES
• simulation and evaluation evidence of improved
  employment incentives
• Administration delivery is working well
• Has provided key to harmonise other forms of
  assistance through tax credits
• Future developments planned, through the
  separation of tax
• credit instruments to target specific objectives
• Integrated child credit
• employment tax credit
• disablement tax credit
• childcare tax credit

45
a global laboratory

• policy transfer extends beyond any bilateral
  axis
• UK policy is increasingly informed by experiences
  in Canada, Australia and OECD countries
• Social Security Select Committee took evidence
  from welfare reforms in Australia, France,
  Belgium, Canada,.
• governments around the world have access to
  evaluation studies and social experiments in a
  global laboratory of welfare reform

46
An emerging consensus?

• Do we see any patterns or common themes in
  welfare reform around the world?
• in specific measures to promote employment?
• in the general structure of welfare reform?

47
An emerging consensus?

• Do we see any patterns or common themes in
  welfare reform around the world?
• in specific measures to promote employment?
• in the general structure of welfare reform?

48
An emerging consensus?

• Do we see any patterns or common themes in
  welfare reform around the world?
• in specific measures to promote employment?
• in the general structure of welfare reform?
• Specific programs to promote employment
• active labour market programs
• mutual obligation and conditionality of welfare
  support
• targetted employment-contingent payments

49
An emerging consensus?

• Do we see any patterns or common themes in
  welfare reform around the world?
• in specific measures to promote employment?
• in the general structure of welfare reform?

50
An emerging consensus?

• Do we see any patterns or common themes in
  welfare reform around the world?
• in specific measures to promote employment?
• in the general structure of welfare reform?
• General patterns in tax and welfare reform
• simplification of income support delivery
• clarity of aims and policy objectives
• coherency of tax and welfare systems
• modularity in structure of income support

51
Active labour market programs

• Many such programs exist
• New Deal, Job Clubs in the UK
• New Deal and Enterprise Zones in US
• JET and Working Nation programs in Australia
• ALMP in Sweden, France, Poland...
• Key concerns
• difficult to evaluate the success of active
  labour market programs
• most evaluation evidence indicates that New Deal
  programs are expensive
• (eg.) NDLP in the UK - 20 additional jobs
  gained at a cost of 20,000 (Aus50,000) per job

52
Mutual obligation

• Not a new concept
• in 16th Century England, the death penalty was
  introduced for those able but unwilling to work
• Under the Thatcher administration, an emphasis
  was placed on individual responsibilities for
  finding employment (on your bike, Sir Norman
  Tebbitt)
• Blair emphasises rights and responsibilities,
  and the social contract. - JSA is
  conditioned on mandatory participation in New
  Deal programs
• In the US, mutual obligation is more stringent
  - mandatory job search, time limitations on
  welfare
• Key challenges
• framing mutual obligation policies with due
  concern for vulnerable groups
• providing effective programs of job creation and
  training.

53
Employment-contingent credits and payments

• Employment tax credits and in-work benefits are
  featuring more and more in modern welfare systems
  around the world
• - Canada (SSP), US (EITC), UK (WFTC), Belgium
  (IWB), France (EC), Ireland (FIS)..
• some are contingent on earned income alone (US,
  France)
• some include hours as well as earnings
  contingencies (UK, Canada)
• most are seen as efficient and effective in the
  delivery of work incentives
• most are now delivered as tax credits rather than
  welfare payments
• most run in tandem with minimum wage policies
• Key issues
• provide a route (but not the only route) to
  coherency
• provide a route to modularity in income support
  payments

54
Common themes in welfare policy reform

• Many tax systems are the product of incremental
  or piecemeal reform. In many cases, the
  resulting structure suffers from
• a complexity in structure, with perverse
  employment incentives, inefficiencies,
  inconsistent EMTR patterns, incoherency of
  instruments with which to target policy
  objectives
• Current patterns of welfare reform are moving
  towards more
• coherent structures of welfare support
• (eg). Employment tax credits in the UK, (eg.)
  ANTS (2000) in Australia
• What are the characteristics of a coherent tax
  and welfare system? - separation of policy
  instruments and objectives
• - simplification of payment structure
• - modularity of welfare support

55
Employment tax credits in the UKa move towards
coherency?

• WFTC targets payments on working families with
  children
• difficult separately to target the three pillars
  of welfare reform
• no separate employment tax credit for families
  without children
• New proposal
• Separate the WFTC into an Employment Tax Credit
  and an Integrated Child Credit.
• Implications? - a clear separation of
  policy instruments and objectives
• - a move towards coherency
• - the potential to build additional modules of
  support onto the existing credit structure

56
Employment tax credits in the UKa move towards
coherency?
57
Employment tax credits in the UKa move towards
coherency?
58
The ANTS (2000) reform in Australiaa move
towards coherency?

• In many respects, YES
• a simplification of twelve payments to families
  children to three separate policy instruments
• the system is transparent and coherent in its
  family and child support measures
• the post-2000 system in Australia is in many
  respects an ornament to modern welfare policy
• A missing pillar?
• Currently, there exists no separate policy
  instrument designed specifically to promote
  employment.
• Introducing an employment tax credit has formed a
  central part of the ongoing welfare reform debate
  in Australia? - Five Economists plan,
  the Reference Group on Welfare Reform

59
Employment tax credits in Australiaprospects for
the future?

• what scope is there for an Employment Tax Credit
  in Australia?
• Lambert (2000) proposed an extension to the
  existing FTB payment structure, similar in
  structure to the US EITC
• Duncan (2002) found the ETC to increase
  employment among lone parent households by around
  5
• Dawkins (2002) flagged up the possibility for
  additional modular credits to sit alongside the
  ETC
• The debate continues...