Taxing imputed income from owner-occupation: distributional implications of alternative packages

The tax treatment of housing has been a subject of continuing debate in the UK, as in many other countries. Economists have often pointed to the exclusion of imputed income from owner-occupation from the income tax base as a major distortion. As a result, a tax on the imputed income of owner-occupiers has been one of the perennial suggestions for ‘root-and-branch’ reform of the tax treatment of housing. But there has been a dearth of empirical analysis of the distributional effects of such proposals. This paper aims to fill that gap. Thus it models the distributional effects of taxation of imputed rental income, and of some proxies to such a tax.

Analysing the Effects of Tax-benefit Reforms on Income Distribution: A Decomposition Approach

To assess the impact of tax-bene?t policy changes on income distribution over time, we suggest a methodology based on counterfactual simulations. We start by decomposing changes in inequal- ity/poverty indices into three contributions: reforms of the tax-bene?t structure (rules, rates, etc.), changes in nominal levels of market incomes and tax-bene?t parameters (bene?t amounts, tax bands, etc.), and all other changes in the underlying population (market income inequality, demographic composition, employment level, etc.). Then, the decomposition helps to extract an absolute measure of the impact of tax-bene?t changes on inequality when evaluated against a distributionally-neutral benchmark, i.e. a situation where tax-bene?t parameters are adjusted in line with income growth. We apply this measure to assess recent policy changes in twelve European countries. Finally, the full decomposition allows quantifying the relative role of policy changes compared to all other fac- tors. We provide an illustration on France and Ireland and check the sensitivity of the results to the decomposition order.tax-benefit policy, inequality, poverty, decomposition, microsimulation

Non-cash Benefits and the Distribution of Economic Welfare

Non-cash benefits can have substantial effects on the distribution of economic welfare. Standard approaches to the inclusion of non-cash benefits in broader measures of resources have failed to take adequate account of the pattern of needs associated with the greater use of health and education services. Our results, for Ireland in the year 2000, show that it is possible to derive more appropriate measures of total resources than have been derived using standard methods. The results indicate that the greatest impact comes from the inclusion of imputed rent for owner occupation as part of the resource measure. When this is done, the rate of “resource poverty” for older people is substantially reduced, in line with results which use indicators of standard of living as well as cash incomes (“consistent poverty”).

Non-Cash Benefits and the Distribution of Economic Welfare

Non-cash benefits can have substantial effects on the distribution of economic welfare. Standard approaches to the inclusion of non-cash benefits in broader measures of resources have failed to take adequate account of the pattern of needs associated with the greater use of health and education services. Our results, for Ireland in the year 2000, show that it is possible to derive more appropriate measures of total resources than have been derived using standard methods. The results indicate that the greatest impact comes from the inclusion of imputed rent for owner occupation as part of the resource measure. When this is done, the rate of "resource poverty" for older people is substantially reduced, in line with results which use indicators of standard of living as well as cash incomes ("consistent poverty").non-cash benefits, income distribution

Unemployment, Welfare Benefits and the Financial Incentive to Work

Although disincentive effects associated with payments have been regulaly found in research in the US and UK, the UK research is disputed and effects have been notable by their absence in studies from Continental Europe. However, much of this research has been hindered by inadequate models of the structure of payments and estimates of in work incomes. In this paper we explicitly model the structue of benefit payments over time and estimate in work income using the SWITCH tax/benefit model. We find that the hazard of exit from unemployment is negatively related to unemployment payments, but distinctive effects appear to influence only those receiving Unemployment Benefts (UB) and are small when compared internationally. Moreover, the exit rate increases for this group as exhaustion approaches at 15 months duration. We find no significant distinctive effects amongst those receiving Unemployment Assistance (UA).

WHAT HAS HAPPENED TO REPLACEMENT RATES? ESRI Working Paper No. 76, May 1996

Financial incentives to take up and stay in work, and the impact of the tax and social welfare systems on these incentives, have become a major preoccupation of Irish policy-makers. Recent Budgets have highlighted measures to "reward work" through income tax and PRSI relief for the low paid, and one aim of the expert working group set up to advise on the integration of the tax and social welfare systems is to point towards ways of improving work incentives. Empirical studies of work incentives generally measure the financial incentive facing individuals in the form of replacement rates, the ratio of income when unemployed to income when in work.1 In calculating replacement rates, choices about precisely what is to be included in the numerator or the denominator have to be made and can matter. More fundamentally, though, different approaches to deriving replacement rates, relying on different types of data, can be distinguished and may not tell the same story about the situation at a particular point in time or changes over time. This paper sets out the alternative approaches which have been used to measure Irish replacement rates, compares the pattern they show for these rates over time, and assesses the implications for our picture of how work incentives have evolved and for measurement practice

Microsimulation modelling of the National Childcare Scheme: Updated cost estimates using SWITCH. ESRI Working Paper 695 January 2021.

We use SWITCH, the ESRI’s tax-benefit model to simulate the scale, cost and distributive impact of the National Childcare Scheme. The paper provides updates to such estimates these authors produced in 2017, when the scheme was in its naissance. We estimate, that under the current parameters, the scheme will cost just under €180 million and will offer reduced childcare costs to 144,000 children. This cash transfer will be of most benefit to families in the bottom third of the income distribution, with the poorest families seeing income rises of 0.7 per cent. This largely progressive profile is attributable to the means-tested nature of the scheme. We bound our estimates by also allowing informal childminders avail of the scheme- this increases the cost and scale of the scheme noticeably. We also highlight, that as is the case with any subsidy, the incidence may not fully be felt by households. Future research ought to examine how the price structure of childcare facilities adapted in response to this new streamlined scheme

The Economic Crisis, Public Sector Pay, and the Income Distribution

An important aspect of the impact of the economic crisis is how pay in the public sector responds – in the face not only of the evolution of pay in the private sector, but also extreme pressure on public spending (of which pay is a very large proportion) as fiscal deficits soar. What are the effects on the income distribution of cutting public sector pay rates or alternative strategies to reduce the public sector pay bill, and how does these vary depending on the evolution of pay in the private sector? This paper investigates these issues using data and a tax-benefit simulation for Ireland, a country which faces a particularly severe fiscal crisis and where innovative measures have already been implemented to claw back pay from public sector workers in the guise of a "pensions levy", followed most recently by a significant cut in nominal pay rates. The SWITCH tax-benefit model first allows the distributional effects of these measures, which achieved a substantial reduction in the net public sector pay bill, to be teased out. The overall impact on the income distribution, set against alternative scenarios for pay in the private sector, is assessed. This provides empirical evidence relevant to policy choices in relation to a key aspect of household income over which governments have direct influence, while at the same time illustrating methodologically how a tax-benefit model can serve as the base for such investigation.public sector pay, income distribution, fiscal crisis

Distributional Effects of Public Education Transfers in Seven European Countries. ESRI WP207. September 2007

Empirical studies of inequality and poverty are usually based on disposable cash incomes, disregarding incomes in-kind (non-cash incomes). Since individuals also derive utility from the consumption of goods and services provided in-kind monetary income is not always a good indicator of an individual’s utility or “command over resources”. Thus, distributional analysis based on cash incomes may be seriously biased. Inclusion of non-cash incomes (arising from private sources or from public provision of services such as health, housing and education) may allow for better targeting and allocation of resources in fighting poverty and social exclusion. The present paper focuses on non-cash incomes arising from publicly provided education in seven European countries (Belgium, Germany, Greece, Italy, Ireland, the Netherlands and the UK), as part of a broader research project (AIM-AP Accurate Income Measurement for the Assessment of Policy) investigating the distributional implications of including elements of non-cash income in the measurement of wider resources

INCOME TAX AND SOCIAL WELFARE REFORMS: MODEL-BASED ESTIMATES OF THE EFFECTS ON HOUSEHOLDS. ESRI Working Paper No. 6, January 1989

There is no shortage of proposals to reform the income tax and social welfare systems. Reports by the Commission on Taxation (1982), the Commission on Social Welfare (1986), the National Economic and Social Council (1986), and plans put forward by several political parties have produced a range of alternative proposals. While the aggregate costs of these reforms have been costed, to varying degrees of accuracy, very little information is available on the distributional implications i.e. the question of who gains and who loses from the particular reform