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Income Taxation, Transfers and Labour Supply at the Extensive Margin

Author

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  • Gábor Kátay
  • Péter Benczúr
  • Áron Kiss
  • Olivér M. Rácz

Abstract

This paper presents a unified parametric approach to estimate the impact of taxes and transfers on the participation decision. We extend existing structural form methodologies by considering the effect of both taxes and transfers. In our framework, participation probabilities are determined by the comparison of disposable income in and out of the labour force, consisting of the (often non-observed) amount of transfers and non-labour income an individual gets if not working and the gains to work (GTW; change in disposable income if accepting a job offer, the sum of net wages and lost transfers). Identification is achieved by utilizing a multitude of tax and transfer reforms. Unlike in the existing literature, our results allow a general assessment of the efficiency and effectiveness of government interventions into the labour market, and more importantly, a micro-based prediction of the impact of tax and welfare reforms.The underlying theory leads to a structural probit equation which relates participation probabilities to gains to work from a full time job, the total amount of non-labour income (including the hypothetical amount of transfers one gets or would get at zero hours worked) and other individual characteristics. The unobserved hypothetical amount of transfers are backed up using individual characteristics and the welfare system’s details for every given year. The estimation process follows the often used three step procedure, as e.g. in Kimmel and Kniesner (1998). The key element of the identification is the careful choice of labour demand shifters, i.e. the variables which have no (or negligible) impact on labour supply directly, but strongly impact the wage and hence impacts activity indirectly. We argue that county dummies and (once we control for individuals’ lifecycle position with a large set of dummy variables) individuals’ age are such variables.Using data from the Hungarian Household Budget Survey, we find that a single equation can already explain a large heterogeneity of individual responsiveness to taxes and transfers: there are large differences among subgroups, driven partly by a composition effect, and partly by a different share of lost transfers in the GTW. The most responsive subgroups are low-skilled, (married) women at child-bearing age and elders, while prime-age higher educated individuals are practically unresponsive to tax and transfer changes at the extensive margin. As an illustration, we fed the main changes of the Hungarian personal income tax and transfer system of 2012 into this framework. We find that the complete elimination of the employee tax credit scheme, a reduction in the tax rate (from 20,3% to 16%) below the average monthly income and a 1 percentage point increase in the social contribution rate overall lead to a decrease in aggregate activity by about one percent.

Suggested Citation

  • Gábor Kátay & Péter Benczúr & Áron Kiss & Olivér M. Rácz, 2014. "Income Taxation, Transfers and Labour Supply at the Extensive Margin," EcoMod2014 6925, EcoMod.
  • Handle: RePEc:ekd:006356:6925
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    References listed on IDEAS

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    Cited by:

    1. Zuzana Siebertova & Matus Senaj & Norbert Svarda & Jana Valachyova, 2013. "To Work or Not to Work? Estimates of Labour Supply Elasticities," Working and Discussion Papers WP 5/2013, Research Department, National Bank of Slovakia.
    2. Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2016. "Labour Force Participation Elasticities: the Case of Slovakia," Working Papers Working Paper No. 1/2016, Council for Budget Responsibility.
    3. Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2016. "Labour force participation elasticities and the move away from a flat tax: the case of Slovakia," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-26, December.
    4. Norbert Švarda & Jana Valachyová & Matúš Senaj & Michal Horváth & Zuzana Siebertová, 2018. "The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation linked with a dynamic macroeconomic framework," Discussion Papers 50, Central European Labour Studies Institute (CELSI).
    5. Michal Horvath & Matus Senaj & Zuzana Siebertova & Norbert Svarda, 2015. "The End of the Flat Tax Experiment in Slovakia," Discussion Papers 15/12, Department of Economics, University of York.
    6. repec:eee:ecmode:v:80:y:2019:i:c:p:171-184 is not listed on IDEAS
    7. Norbert Švarda & Jana Valachyová & Matúš Senaj & Zuzana Siebertová, 2015. "To Work or Not to Work? Updated Estimates of Labour Supply Elasticities," Discussion Papers 32, Central European Labour Studies Institute (CELSI).
    8. Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2018. "The Evaluation of Fiscal Consolidation Strategies," International Journal of Microsimulation, International Microsimulation Association, vol. 11(3), pages 39-58.
    9. Armando Barrientos & Alma Kudebayeva, 2015. "Social transfers and women’s labour supply in Kyrgyzstan," Global Development Institute Working Paper Series 21515, GDI, The University of Manchester.
    10. Michal Horvath & Matus Senaj & Zuzana Siebertova & Norbert Svarda & Jana Valachyova, 2018. "Evaluating the Aggregate Effects of Tax and Benefit Reforms," Working Papers Working Paper No. 1/2018, Council for Budget Responsibility.
    11. Kamil Galuscak & Gabor Katay, 2014. "Labour Force Participation and Tax-Benefit Systems: A Cross-Country Comparative Perspective," Working Papers 2014/10, Czech National Bank.
    12. Kamil Galuščák & Petr Hlaváč & Petr Jakubík, 2016. "Household resilience to adverse macroeconomic shocks: evidence from Czech microdata," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 377-402, May.
    13. repec:eee:ecmode:v:75:y:2018:i:c:p:441-457 is not listed on IDEAS
    14. Gergely Baksay & Balázs Csomós, 2015. "Analysis of the Changes in the Hungarian Tax System and Social Transfers between 2010 and 2014 Using a Behavioural Microsimulation Model," Society and Economy, Akadémiai Kiadó, Hungary, vol. 37(supplemen), pages 29-64, December.
    15. LarsCalmfors & GiancarloCorsetti & JohnHassler & GillesSaint-Paul & Hans-WernerSinn & Jan-EgbertSturm & ÁkosValentinyi & XavierVives, 2012. "Chapter 5: The Hungarian Crisis," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 115-130, February.
    16. Mihály Szoboszlai & Zoltán Bögöthy & Pálma Mosberger & Dávid Berta, 2018. "Assessment of the tax and transfer changes in Hungary between 2010 and 2017 using a microsimulation model," MNB Occasional Papers 2018/135, Magyar Nemzeti Bank (Central Bank of Hungary).
    17. Kamil Galuscak & Petr Hlavac & Petr Jakubik, 2014. "Stress Testing the Private Household Sector Using Microdata," Working Papers 2014/02, Czech National Bank.

    More about this item

    Keywords

    Hungary; Tax policy; Labor market issues;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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