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Long-Term Participation Tax Rates

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  • Charlotte Bartels

Abstract

Generous income support programs as provided by European welfare states have often been blamed to reduce work incentives for the lowskilled and to increase durations of unemployment. Standard studies measure work incentives based on annual income concepts. This paper analyzes work incentives inherent in the German tax-benefit system when extending the time horizon to three years (long-term). Participation tax rates are computed for 1-year and 3-year periods 1995-1997 and 2005-2007 to reveal potential effects of the labor market and tax reforms between 1999 and 2005. The results show that participation tax rates are significantly lower over a 3- year period pointing at an overestimation of the disincentives by standard measures. Reforms reduced participation tax rates, particularly for singles and low-income individuals.

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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 609.

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Length: 37 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp609

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Keywords: Welfare; work incentives; unemployment; unemployment insurance;

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  1. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," OECD Social, Employment and Migration Working Papers 28, OECD Publishing.
  2. Jukka Pirttilä & Hakan Selin, 2011. "Tax Policy and Employment: How Does the Swedish System Fare?," CESifo Working Paper Series 3355, CESifo Group Munich.
  3. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1039-1073, August.
  4. Lyle Scruggs, 2006. "The Generosity of Social Insurance, 1971--2002," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 22(3), pages 349-364, Autumn.
  5. Cathal O'Donoghue, 2011. "Do Tax–Benefit Systems Cause High Replacement Rates? A Decompositional Analysis Using EUROMOD," LABOUR, CEIS, CEIS, vol. 25(1), pages 126-151, 03.
  6. Gregory, Mary & Jukes, Robert, 2001. "Unemployment and Subsequent Earnings: Estimating Scarring among British Men 1984-94," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(475), pages F607-25, November.
  7. Charlotte Bartels, 2011. "Redistribution and Insurance in the German Welfare State," SOEPpapers on Multidisciplinary Panel Data Research 419, DIW Berlin, The German Socio-Economic Panel (SOEP).
  8. Moon-Kak Kim & Solomon W. Polachek, 1994. "Panel Estimates of Male-Female Earnings Functions," Journal of Human Resources, University of Wisconsin Press, vol. 29(2), pages 406-428.
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