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How taxes and welfare distort work incentives: static lifecycle and dynamic perspectives

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  • Mike Brewer

    ()
    (Institute for Fiscal Studies and ISER, Essex University)

  • Monica Costa Dias

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Jonathan Shaw

    ()
    (Institute for Fiscal Studies)

Abstract

Personal taxes and benefits affect the incentive to work over the lifecycle by altering income-age profiles, insuring against adverse shocks, and changing the returns to human capital. Previous work investigating the impact of taxes and benefits on work incentives has tended to ignore these dynamic considerations. In this paper, we use a dynamic model to show how a lifecycle perspective alters our impression of the effect of the tax and benefit system on female work incentives. We describe how work incentives change over the life and show how they depend on lifecycle circumstances. We also devise a forward-looking measure of work incentives that incorporates all the dynamic considerations likely to affect work decisions at any given age. We find that individuals experience considerable variability in work incentives across life that outweighs the variability across individuals. Changes pattern of family types across life is key to explaining these patterns: work incentives vary dramatically depending on family composition, and most women experience a number of different family types during the course of their lives. We also find that differences in family type are an important explanation for why static and forwardlooking PTRs diverge, though this is more to do with differences in how women in families with different compositions behave.

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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W13/01.

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Date of creation: Jan 2013
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Handle: RePEc:ifs:ifsewp:13/01

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Keywords: female labour supply; lifecycle; work incentives; taxes;

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  1. Mike Brewer & James Browne & Wenchao Jin, 2012. "Universal Credit: A Preliminary Analysis of Its Impact on Incomes and Work Incentives," Fiscal Studies, Institute for Fiscal Studies, vol. 33(1), pages 39-71, 03.
  2. Eckstein, Zvi & Mira, Pedro Solbes & Wolpin, Kenneth, 1998. "A Quantative Analysis of Swedish Fertility Dynamics: 1751-1990," CEPR Discussion Papers 1832, C.E.P.R. Discussion Papers.
  3. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  4. Eckstein, Z. & Mira, P. & Wolpin, K.I., 1997. "A Quantitative Analysis of Swidish Fertility Dynamics : 1751-1990," Papers 22-97, Tel Aviv.
  5. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  6. Eckstein, Zvi & Wolpin, Kenneth I, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 375-90, July.
  7. Stuart Adam & James Browne, 2010. "Redistribution, work incentives and thirty years of UK tax and benefit reform," IFS Working Papers W10/24, Institute for Fiscal Studies.
  8. Adda, Jérôme & Costa Dias, Mònica & Meghir, Costas & Sianesi, Barbara, 2007. "Labour market programmes and labour market outcomes: a study of the Swedish active labour market interventions," Working Paper Series 2007:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
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