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

Author

Listed:
  • Mike Brewer

    () (Institute for Fiscal Studies and University of Essex)

  • Monica Costa Dias

    () (Institute for Fiscal Studies and Institute for Fiscal Studies)

  • Jonathan Shaw

    () (Institute for Fiscal Studies and Turing Institute)

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.

Suggested Citation

  • Mike Brewer & Monica Costa Dias & Jonathan Shaw, 2013. "How taxes and welfare distort work incentives: static lifecycle and dynamic perspectives," IFS Working Papers W13/01, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:13/01
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    File URL: http://www.ifs.org.uk/wps/wp1301.pdf
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    References listed on IDEAS

    as
    1. Zvi Eckstein & Pedro Mira & Kenneth I. Wolpin, 1999. "A Quantitative Analysis of Swedish Fertility Dynamics: 1751-1990," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 137-165, January.
    2. 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.
    3. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    4. Zvi Eckstein & Kenneth I. Wolpin, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 375-390.
    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, March.
    6. 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.
    7. Richard Blundell & Monica Costa Dias & Costas Meghir & Jonathan Shaw, 2011. "The long-term effects of in-work benefits in a life-cycle model for policy evaluation," CeMMAP working papers CWP07/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    8. Jonathan Shaw, 2011. "FORTAX: UK tax and benefit system documentation," IFS Working Papers W11/08, Institute for Fiscal Studies.
    9. 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.
    10. Mike Brewer & Monica Costa Dias & Jonathan Shaw, 2012. "Lifetime inequality and redistribution," IFS Working Papers W12/23, Institute for Fiscal Studies.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    female labour supply; lifecycle; work incentives; taxes;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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