Taxbenefits indicators from a work incentives perspective

1
Tax-benefits indicators from a work incentives
perspective

• Comments upon
• Christopher Heady and Herwig Immervoll
• Rewarding Jobs Government Policy and Work
  Incentives
• By Paolo Sestito
• Economic Adviser
• Ministry of Labour and Social Policy - Italy

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Comments Outline

• Taxes and benefits from a labour supply
  perspective
• Notional effective rates as a summary measure of
  the impact of taxes and benefits upon the
  relevant budget constraint faced by potential
  workers
• When those synthetic measures make sense
• Summary of potentialities and pitfalls of those
  summary measures
• An agenda for further developments
• Which indicators and how to choose among
  indicators
• How to complement notional effective rates

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Taxes and benefits from a labour supply
perspective

• Taxes and benefits reshape the whole feasibility
  frontier (the budget constraint) in the
  income/leisure space
• Different slopes over different segments
• Kinks and non convexities
• For each individual one would need to consider
  the whole budget constraint
• Personal and family characteristics shape the
  budget constraint as they impact upon both taxes
  and benefits. Relevant cases also depend upon
  individuals gross wage (his or her marginal
  product) and tastes (taste shifters being
  related to personal and family characteristics)

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Notional effective rates as a summary measure

• Average effective rates as a convexification of
  the budget constraint with respect to a given
  discrete choice (work a given amount of
  time/effort vs. non-work)
• Marginal effective rates as measure of the local
  slope (piecewise linearization of the budget
  constraint)
• The relevance of both is conditional upon the
  relevance of personal and family circumstances
  (including productivity and the gross wage one
  can earn in the market) and of the discrete
  choice/local segment under consideration.

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When those summary measures make sense

• The personal/family related circumstances have to
  identify empirically relevant (high supply
  elasticity) groups and situations
• productivity (APW levels)
• Family types and individuals within families
• The discrete choices and the local segments have
  to be empirically relevant (for the groups and
  situations under examination).
• Notice that such an empirical relevance may
  depend upon the shape of the whole budget
  constraint (technically speaking being
  endogenously determined)
• Dynamic considerations including entitlement
  effects possibly associated to benefit schemes -
  have to be neglected as less relevant.

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How far summarizing?

• Average rates are already a summary measure of
  the whole budget constraint (whose validity
  depends however upon the identification of the
  relevant discrete binary comparisons, which
  depend upon the whole individuals budget
  constraint and preferences)
• Marginal rates are not a summary measure. One
  further step might then be averaging them over
  given (empirically relevant) segments of the
  budget constraint
• However, in doing so one would need to preserve
  their nature of marginal rates (eg. consider the
  mode/median and the range of the marginal rates
  over the selected segment)
• Summary across different cases?
• Maybe, but rather cautiously and only in order to
  summarize countries and time periods comparisons
• In any case, averaging a relatively large number
  of cases seems more sensible than arbitrarily
  picking up one given case (as unfortunately often
  made in the EU context!)

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Potentialities and pitfalls

• Easy and fast updates of the notional rates
  (possibly even with respect to planned changes
  whose implications may so be easily grasped)
• Possible use in a benchmarking context because of
  the rather immediate meaning and comprehensive
  nature of the notional rates
• However, benchmarking has to be made cautiously
  because of their summary nature (particularly
  when aggregating over different cases)
• Moreover, notional rates do not provide an
  assessment of resources implications and
  redistributional impact of policy packages,
  issues inescapable when shaping tax and benefits
  systems

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Further developments - 1

• Relevant situations/groups common priority
  areas
• Benefits recipients need to take into account
  the (empirical) plurality of schemes and the
  differences usually existing over their potential
  duration (as a first approximation of more
  dynamic considerations)
• Secondary earners (in the household) start from
  a focus upon the marginal net income implications
  for the household treated as an integrated
  decision-maker, later on taking into account of
  more complex decision-making structures need to
  to take into account the care costs implications
  of the work decision?
• Elderly workers the static framework implied by
  the approach is not really capable to deal with
  these issues on the other hand, the other
  approaches often implemented unrealistically
  assume perfect foresight and perfect capital
  markets
• Low wage/low effort (hours) workers as high
  elasticity suppliers
• Gross labour cost vs. earnings (net of employers
  contributions)
• Marginal product linked to gross labour cost
• Is self-employment so easily available to justify
  netting from employers contributions?
• Role of perceptions and the perceived role of
  total (employersemployees) social security
  contributions

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Further developments - 2

• Exploit the fast update features of the approach
• Notional rates may be produced with respect to
  the rules normally dictated for the forthcoming
  year
• Balance national and international perspectives
• The relevant cases to be selected may differ
  across countries and over time, their salience
  possibly being affected by the tax and benefits
  system itself.
• Tradeoff between the use of common and constant
  cases capable to benchmark countries and their
  evolution over time and the relevance of the
  selected indicators in each given country/time
  period.

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Further developments - 3

• Need to complement notional rates with other
  approaches
• Macro measures do not seem very sensible in order
  to provide indicators
• Microsimulation models on the contrary may
  provide a better assessment of concrete policy
  packages (which may also be simulated assuming a
  balanced budget in order to focus upon
  redistribution/work incentives tradeoffs) and may
  better identify nationally relevant cases.
• Microsimulation models may also simulate
  implications of expected socio-demographic
  changes. On their basis one might update weighted
  averages of notional rates in the far future