Source: Brewer, Saez and Shephard (Mirrlees Review)

0.0000

0.0000

0.0001

0.0010

0.0100

£100,000 £150,000 £200,000 £250,000 £300,000 £350,000 £400,000 £450,000 £500,000

Prob

abili

ty d

ensi

ty (l

og s

cale

)

Pareto distribution

Actual income distribution

Pareto distribution as an approximation to the income distribution

A. Top 1% Income Share and MTR, 1962-2003

0%

10%

20%

30%

40%

50%

60%

70%

80%

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

Mar

gina

l Tax

Rat

e

4%

6%

8%

10%

12%

14%

16%

Inco

me

Shar

eTop 1% MTRTop 1% income share


B. Top 5-1% Income and MTR, 1962-2003

0%

10%

20%

30%

40%

50%

60%

70%

80%

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

Mar

gina

l Tax

Rat

e

4%

6%

8%

10%

12%

14%

16%

Inco

me

Shar

e

Top 5-1% MTR

Top 5-1% income share


Table: Taxable Income Elasticities at the Top

Simple Difference (top 1%) DD using top 5-1% as control

1978 vs 1981 0.32 0.081986 vs 1989 0.38 0.411978 vs 1962 0.63 0.862003 vs 1978 0.89 0.64

Full time series 0.69 0.46 (0.12) (0.13)

With updated data the estimate remains in the .35 - .55 range with a central estimate of .46, but remain quite fragile

Note also the key relationship between the size of elasticity and the tax base (Slemrod and Kopczuk, 2002)

6

EITC Schedule in US – Single Parent Families, 2004

Larger credit, covering higher earners for families with two or more children.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000Earnings

EIT

C C

redi

t

Two or more children One Child

Phase In Region

Flat Region

Phase-out Region

7

EITC Benefit for Selected Tax Years(A) Schedule for Family with 1 Child

$0

$1,000

$2,000

$3,000

$4,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Earnings (1996 $)

EITC

Cre

dit (

1996

$) 1996 EITC

1993 EITC

1990 EITC

1984 EITC

8

(B) Schedule for Family with 2+ Children

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Earnings (1996 $)

EITC

Cre

dit (

1996

$)

1996 EITC

1993 EITC

1990 EITC

1984 EITC

EITC Benefit for Selected Tax Years

9

Number of EITC Recipient Families (Millions)

Source: Green Book, 2004, Joint Committee on Taxation, Ways and Means Committee

0

5

10

15

20

25

1975 1980 1985 1990 1995 2000Year

EITC

Rec

ipie

nts

(Mill

ions

)

10

In-work Credits in OECD Countries in 2001

Target group

Approximate Maximum

Income Increase (Euros)

Phase-in

Phase-out

Hours criterion

Belgium1 Individual 440 Yes Yes No Canada, Quebec 2 Families 3,150 Yes Yes No Finland Individual 290 Yes Yes No France3 Individual 230 Yes Yes No Ireland4 Families 2,260 or more No Yes Yes Netherlands Individual 920 Yes No No New Zealand5a Families 7,800 No Yes Yes New Zealand5b Families 780 per child No Yes Yes UK 6 Families 6,150 or more No Yes Yes United States Families 4,000 Yes Yes No Source: Owens (2005), Table 3.

Central position in the OECD labour market policy debate

11

The EITC and marginal tax rates more broadlyMarginal Tax Rates for Families with One Child, 2004

Source: NBER's TAXSIM model tabulation by Hoynes (2006)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

$0 $25,000 $50,000 $75,000 $100,000 $125,000 $150,000

Earnings

Mar

gina

l Tax

Rat

e

Single 1-child

12

The Tax Credit Expansion in the UK: 2000 Reform

00 10 20 30 40 50 60 70

Hours worked per week

WFT

C

Family Credit WFTC

70%

55%

£120 -transfers per week for a min. wage lone parent

13

Expenditure on in-work programmes in the UK

14

The US Earned Income Tax Credit

£0

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

£0 £5,000 £10,000 £15,000 £20,000 £25,000

Gross income (£/year)

EITC

15

The UK Working Families Tax Credit

£0

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

£0 £5,000 £10,000 £15,000 £20,000 £25,000


WFTC

16

£0

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

£0 £5,000 £10,000 £15,000 £20,000 £25,000


EITC

WFTC

The UK and US tax credit systems compared

17

0

500

1000

1500

2000

2500

0 5 10 15 20 25 30 35 40 45 50 55 60

Weekly Hours of Work

Inco

me

per

Mon

th ($

1995

)

Income Assistance Self Sufficiency Program

Budget Constraint for a Single Parent on Minimum Wage

IA

SSP

Canadian Self Sufficiency Program

18

Monthly Employment Rate for a Single Parent with One Child BC

10

15

20

25

30

35

40

-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16

Months from Random Assignment

Mon

thly

Em

ploy

men

t Rat

e

Controls Experimentals


19

Estimating the impact of a tax credit – with no experiment.

In 1984 the US EITC system looked like:

0500

1000150020002500300035004000

0 5000 10000 15000 20000 25000 30000

Family Earnings

EIT

C ($

1995

)

one kid two kids

Phase-in at11%

Phase-out at12.2%

Maximum credit $550

20

The EITC in 1990

0500

1000150020002500300035004000

0 5000 10000 15000 20000 25000 30000

Family Earnings

EIT

C ($

1995

)

one kid two kids

21

The EITC in 1993

0500

1000150020002500300035004000

0 5000 10000 15000 20000 25000 30000

Family Earnings

EIT

C ($

1995

)

one kid two kids

22

The EITC in 1996

0

1000

2000

3000

4000

0 5000 10000 15000 20000 25000 30000

Family Earnings

EIT

C ($

1995

)

one kid two kids

Phase-in increasedto 40%

Maximum credit now $3556

Phase-out at 21%

23

00 10 20 30 40 50 60 70

Hours worked per week

WFT

C

Family Credit WFTC

70%

55%

£120 -

transfers per week for a min. wage lone parent pre and post 2000

Evaluating the UK Tax Credit Reforms

24

1996 1997 1998 1999 2000 2001 2002No Work 0.753 0.762 0.769 0.770 0.774 0.767 0.775child

Age 26.789 26.906 26.799 26.957 27.104 27.317 27.450Non-white 0.073 0.077 0.080 0.084 0.091 0.098 0.102Left education before 16 0.078 0.072 0.062 0.057 0.052 0.047 0.043Left education at 16 or 17 0.394 0.381 0.375 0.375 0.363 0.353 0.356London and South-East 0.341 0.350 0.349 0.347 0.354 0.360 0.352Rented accommodation 0.343 0.353 0.358 0.340 0.339 0.350 0.346

Observations 26243 24463 24410 23987 22558 23517 22846

Child Work 0.417 0.425 0.444 0.464 0.477 0.487 0.496

Age 32.330 32.580 32.655 32.863 33.181 33.280 33.288Non-white 0.100 0.099 0.091 0.098 0.106 0.112 0.111Left education before 16 0.209 0.196 0.189 0.169 0.154 0.161 0.155Left education at 16 or 17 0.632 0.627 0.633 0.635 0.646 0.641 0.637London and South-East 0.285 0.285 0.285 0.293 0.294 0.303 0.301Rented accommodation 0.686 0.704 0.708 0.696 0.697 0.694 0.676Number of kids 1.783 1.785 1.791 1.784 1.778 1.776 1.794Age of youngest child 6.187 6.249 6.272 6.414 6.592 6.612 6.676Observations 14613 14172 14550 14343 13572 14097 13996

Table 1: Sample Descriptives for Single Women

25

Employment rates

26

Difference-in-Differences: Lone Mothers Employment

Single Women

Marginal Effect

Standard Error

Sample Size

Family Resources Survey

3.57 0.81 74,959

Labour Force Survey

3.81 0.33 233,208

Data: Spring 1996 – Spring 2003.

Drop: Summer 1999 – Spring 2000 inclusive; individuals aged over 45.

Outcome: employment. Average impact x 100, employment percentage.

Matching Covariates: age, education, region, ethnicity,..

27

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

£300.00

0 4 8 12 16 20 24 28 32 36 40 44 48

hours of work

WFTCNet earningsOther income

WFTC interactions with other taxes and benefits in the UK

single parent on minimum wage

28

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

£300.00

0 5 10 15 20 25 30 35 40 45 50

hours of work

WFTCIncome SupportNet earningsOther income


29

£0.00

£50.00

£100.00

£150.00

£200.00

£250.00

£300.00

0 5 10 15 20 25 30 35 40 45 50

hours of work

Local tax rebateRent rebateWFTCIncome SupportNet earningsOther income


Hours’ distribution for lone parents, 1990

Hours’ distribution for lone parents, 1993

32

Fra

ctio

n

tothours16 30 40 50

.05

.1

.15

Weekly Hours WorkedLow Education Single Mothers (aged 18-45)

Lower hours limit

33

Fra

ctio

n

tothours16 30 40 50

.05

.1

.15

Weekly Hours WorkedLow Education Single Childless Women (aged 18-45)

34

Reform impacts on budget constraints for lone parent

£0

£50

£100

£150

£200

£250

£300

£350

£0 £50 £100 £150 £200 £250 £300 £350

Income before taxes and benefits

Inco

me

afte

r tax

es a

nd

bene

fits April 97

April 00

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support

change in in-work support only

35

£0

£50

£100

£150

£200

£250

£300

£350

£0 £50 £100 £150 £200 £250 £300 £350

Income before taxes and benefits

Inco

me

afte

r tax

es a

nd

bene

fits April 97

April 00

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support

Reform impacts on budget constraints for lone parent

Adding in the change in income support

36

Take-up and WFTCVariation in take-up probability with entitlement to FC/WFTC

0.2

.4.6

.81

Pro

babi

lity

of ta

ke-u

p

0 50 100 150 200FC/WFTC entitlement (£/week, 2002 prices)

Lone parents Couples

FRS

Estimation Results, Full Sample

38

Structural Model Elasticities

Earnings Density Extensive Intensive0 0.3966

80 0.1240 0.5029 0.5029140 0.1453 0.7709 0.3944220 0.1723 0.7137 0.2344300 0.1618 0.4920 0.0829Participation elasticity 1.1295

(a) Youngest Child Aged 11-18

39

Structural Model Elasticities

Earnings Density Extensive Intensive0 0.5942

80 0.1694 0.2615 0.2615140 0.0984 0.6534 0.1570220 0.0767 0.5865 0.1078300 0.0613 0.4984 0.0834Participation elasticity 0.6352

(c) Youngest Child Aged 0-4

• Check the robustness of the structural model by the ability to simulate the impact of the WFTC reform

40

Structural Evaluation Simulation Results: WFTC Expansion

Notes: Simulated on FRS data; Standard errors in italics.

All: 5.12 without change in take-up – key impact effect

All y-child y-child y-child y-child0 to 2 3 to 4 5 to 10 11 to 18

Change in employment rate: 5.95 3.09 7.56 7.54 4.960.74 0.59 0.91 0.85 0.68

Average change in hours: 1.79 0.71 2.09 2.35 1.650.2 0.14 0.23 0.34 0.2

41

Structural Evaluation Simulation Results: All Reforms

Notes: Simulated on FRS data; Standard errors in italics.

All y-child y-child y-child y-child0 to 2 3 to 4 5 to 10 11 to 18

Change in employment rate: 3.68 0.65 4.53 4.83 4.030.84 0.6 0.99 0.94 0.71

Average change in hours: 1.02 0.01 1.15 1.41 1.240.23 0.21 0.28 0.28 0.22

Difference-in-Differences: Impact on Employment

Single Women Marginal Effect Standard Error Sample Size

Family Resources Survey

3.57 0.81 74,959

Labour Force Survey

3.81 0.33 233,208

Data: Spring 1996 – Spring 2003.

Drop: Summer 1999 – Spring 2000 inclusive; individuals aged over 45.

Outcome: employment. Average impact x 100, employment percentage.

Matching Covariates: age, education, region, ethnicity,..

• The diff-in-diff parameter can be identified from the structural evaluation model

• Simulated diff-in-diff parameter• The structural model then defines the average impact of the

policy on the treated as:

• Compare simulated diff-in-diff moment with diff-in-diff

Evaluation of the ‘ex-ante’ structural model

SEMDD

X

fX, ,D 1dF

T 1,t 1dFX X

fX, ,D 0dF

T 1,t 0dFX

X

fX, ,D 0dF

T 0,t 1dFX X

fX, ,D 0dF

T 0,t 0dFX

SEMX Prh 0|X, D 1 Prh 0|X, D 0

44

All reforms, 1999-2002

Change in participation (ppt)

WFTC All reforms

Lone Parents 5.11 3.66

Married Women -0.57 -0.49

Partner working -0.64 -0.52

Partner not working 0.06 -0.26

Married Men 0.75 -0.40

Partner working 0.19 -0.55

Partner not working 2.11 -0.01

WFTC impact

45

Employment Trends for Women:1978-2005

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1978 1983 1988 1993 1998 2003

singlenokids singlekids couplenokids couplekids

46

00

After Tax Income

Earnings

An Optimal Schedule

EITC ‘bubble’ region

47

00

After Tax Income

Earnings

break even point

subsidy or‘phase-in’region

‘phase-out’region

Some ‘IncomeSupport’ – but what form?

A ‘Typical’ ‘Integrated’ Optimal Schedule

48

The Optimal Schedule, Youngest Child Aged 0-4

100.00

150.00

200.00

250.00

300.00

0 50 100 150 200 250 300

No hours rule 16 hours rule

Weekly earningsMarch 2002 prices£6 per hour

Blundell and Shephard (2006)

49

An Optimal Schedule, Youngest Child Aged 5-10

100.00

150.00

200.00

250.00

300.00

350.00

0 50 100 150 200 250 300

No hours rule 16 hours ruleWeekly earningsMarch 2002 prices


50


100.00

150.00

200.00

250.00

300.00

350.00

0 50 100 150 200 250 300

No hours rule 16 hours rule

Weekly earningsMarch 2002 prices


51


100.00

150.00

200.00

250.00

300.00

350.00

0 50 100 150 200 250 300

No hours rule 16 hours rule Optimal hours rule


Effect of child age revenue neutral reforms on average PTRs across the earnings distribution, by age of youngest child

Notes: Non-par

20%

30%

40%

50%

60%

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

Gross earnings (£/week)

Youngest child 0-4, before reform Youngest child 0-4, after reformYoungest child 5-18, before reform Youngest child 5-18, after reform

Effect of early retirement revenue neutral reforms on average PTRs across the earnings distribution, by age

10%

20%

30%

40%

50%

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

Gross earnings (£/week)

Under 55, before reform Under 55, after reform55-70, before reform 55-70, after reform

WFTC Reform budget constraint for mother in couple

Notes: Two children under 5. Assumes hourly wage of £4.10, no housing costs or council tax liability and no childcare costs.The first earner in the couple is assumed to earn £300 per week in 2002 prices.

260

280

300

320

340

360

380

400

420

440

460

0 5 10 15 20 25 30 35 40 45 50

Hours worked

Net

inco

me

(£ p

.w.,

2002

pric

es)

1999 2002

55

Budget constraints for a 2nd earner in a couple

£200

£250

£300

£350

£400

£450

£500

£550

£0 £50 £100 £150 £200 £250 £300 £350

2nd earner's income before taxes and benefits

Fam

ily in

com

e af

ter t

axes

and

be

nefit

s

April 97

April 00

April 04

Assumes 2 children < 11, hourly wage of £5/hour, no childcare costs, no rent, no child support, partner earns £300/wk

56

Monthly Employment Rate for a Single Parent with One Child BC

10

15

20

25

30

35

40

-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16

Months from Random Assignment

Mon

thly

Em

ploy

men

t Rat

e

Controls Experimentals


57

.1.1

5.2

.25

.3E

mpl

oym

ent r

ate

0 10 20 30 40 50 60Months after random assignment

control experimental

But …dynamic effects on employment rates?

58

66.

57

7.5

88.

5H

ourly

real

wag

es



and dynamic effects on wages and productivity?

59

100

200

300

400

Mon

thly

ear

ning

s



SSP: Monthly earnings by months after RA

60

Percentage receiving income assistance.6

.7.8

.91

Per

cent



Percentage receiving income assistance by month after RA

Can the reforms explain weekly hours worked?Single Women (aged 18-45) - 2002

Source: Brewer, Saez and Shephard (Mirrlees Review)

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Transcript of Source: Brewer, Saez and Shephard (Mirrlees Review)