Estimating the impact of the Families Package changes in financial incentives

In this paper we analyse behavioural responses to changes in financial incentives associated with the 2018 Families Package. For this analysis, we followed the methods pioneered by Saez (2010) and Chetty et al. (2013), which use bunching around kink points in the income schedule to estimate the degree of behavioural response. In general, the role of financial incentives in labour supply behaviour has been the subject of investigation for many decades, and although there is considerable concern about adverse labour supply responses to increased generosity of benefits, the available evidence on labour supply responses is mixed and surprisingly muted. We find no evidence of response around the salient kink points related to the policy changes; however, in contrast to the lack of bunching around the policy points, we see clear evidence of bunching around the top two marginal tax rate (MTR) thresholds, as well as at twice these amounts by coupled parental units. This suggests the methodology is able to identify such behavioural responses if they exist. Moreover, according to the theoretical model established in Saez (2010), the degree of bunching around the MTR thresholds should be similar if not less than that around the Families Package policy points we examine. The results in that respect are surprising, though Saez (2010), Chetty et al. (2013), and others find that bunching tends to occur around high visibility, easily understood kink points which have large impacts on disposable income.