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

  • Mike Brewer


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

  • Monica Costa Dias


    (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Jonathan Shaw


    (Institute for Fiscal Studies)

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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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
Date of revision:
Handle: RePEc:ifs:ifsewp:13/01
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  1. 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.
  2. Eckstein, Z. & Mira, P. & Wolpin, K.I., 1997. "A Quantitative Analysis of Swidish Fertility Dynamics : 1751-1990," Papers 22-97, Tel Aviv.
  3. Michael Keane, 2010. "Labor Supply and Taxes: A Survey," Working Paper Series 160, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  4. 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.
  5. 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.
  6. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  7. 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.
  8. 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.
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