Back to the Future - Decomposition Analysis of Distributive Policies using Behavioural Simulations

For policy makers and analysts, it is important to isolate the redistributive im- pact of tax-benefit policy changes from changes in the environment in which policies operate. When actual reforms are motivated by work incentives, it is also crucial to evaluate behavioural responses and the distributional consequences thereof. For that purpose, we embed counterfactual simulations in a formal framework based on the Shapley value decomposition and quantify the relative roles of (i) tax-benefit policy changes (direct policy effect), (ii) labour supply responses to the policy reforms (in- direct effect) and (iii) all other factors affecting income distribution over time. An application to the UK shows that the redistributive reforms of the 1998-2001 period have offset the increase in inequality that would have occurred otherwise. They also contribute to a strong decline in child poverty and poverty amongst single parent households. In the latter group, a third of the headcount poverty reduction (and half of the reduction in the depth of poverty) is on account of the very large incentive effect of policy changes.Tax-benefit policy, inequality, poverty, Shapley value decompo- sition, behavioural microsimulation, labour supply

The Distributional Effects of Tax-Benefit Policies under New Labour: A Shapley Decomposition

Using counterfactual microsimulations, Shapley decompositions of time change in inequality and poverty indices make it possible to disentangle and quantify the relative effect of tax-benefit policy changes, compared to all other effects including shifts in the distribution of market income. Using this approach also helps to clarify the different issues underlying the distributional evaluation of policy reforms. An application to the UK (1998-2001) confirms previous findings that inequality and depth of poverty would have increased under the first New Labour government, had important reforms like the extensions of income support and tax credits not been implemented. These reforms have also contributed to substantially reduce poverty among families with children and pensioners.tax-benefit policy, inequality, poverty, Shapley decomposition, microsimulation

On Modeling Household Labor Supply With Taxation

Discrete choice models of labor supply easily account for nonlinearity and nonconvexity in budget sets caused by tax-benefit systems. As a result, they have become very popular for ex ante evaluations of policy reforms. In this paper, we question whether the degree of flexibility and the implicit household representation in these models are satisfying when confronted to the data. First, we show that attempts to interpret discrete models structurally lead to unnecessary parametric restrictions in most studies. We suggest instead a fully flexible model that retains usual assumptions on economic rationality except regularity conditions on leisure. Indeed, coefficients may account for both tastes and costs of work, possibly making 'preferences' appear nonconvex. Second, we show that the static unitary representation, implicit in most tax policy analyses, is rejected against a more general model with price- and income- dependent preferences. The latter can be rationalized in terms of collective or intertemporal models and offers promising perspectives in these directions. Simulations show that the magnitude of predicted labor supply responses to tax-benefit reforms is sensitive to the underlying household representation.multinomial logit, household labor supply, tax reform, unitary model, collective model

The Distributional Effects of Tax-benefit Policies under New Labour - A Shapley Decomposition

Using counterfactual microsimulations, Shapley decompositions of time change in inequality and poverty indices make it possible to disentangle and quantify the relative effect of tax-benefit policy changes, compared to all other effects including shifts in the distribution of market income. Using this approach also helps to clarify the different issues underlying the distributional evaluation of policy reforms. An application to the UK (1998-2001) confirms previous findings that inequality and depth of poverty would have increased under the first New Labour government, had important reforms like the extensions of income support and tax credits not been implemented. These reforms have also contributed to substantially reduce poverty among families with children and pensioners.Tax-benefit policy; inequality; poverty; Shapley decomposition; microsimulation

A Theory of Child Targeting

There is a large empirical literature on policy measures targeted at children but surprisingly very little theoretical foundation to ground the debate on the optimality of the different instruments. In the present paper, we examine the merit of targeting children through two general policies, namely selective commodity taxation and cash transfer to family with children. We consider a household that comprises an adult and a child. The household behavior is described by the maximization of the adult’s utility function, which depends on the child’s welfare, subject to a budget constraint. The relative effects of a price subsidy and of a cash benefit on child welfare are then derived. In particular, it is shown that ‘favorable’ distortions from the price subsidies may allow to redistribute toward the child. The framework is extended to account for possible paternalistic preferences of the State. Finally, it is shown that, in contrast to the traditional view, well-chosen subsidies can be more cost effective than cash transfers in alleviating child poverty.commodity taxation, child benefit, targeting, intrahousehold distribution, social welfare, paternalism, labeling

Tax-Benefit Revealed Redistributive Preferences Over Time: Ireland 1987-2005

By inverting Saez (2002)'s model of optimal income taxation, we characterize the redistributive preferences of the Irish government between 1987 and 2005. The (marginal) social welfare function revealed by this approach is consistently comparable over time and show great stability despite profound changes in market incomes and important fiscal reforms over the period. Results are robust to numerous checks regarding data, income concepts and elasticities. A comparison with the UK shows marked differences reflecting the narrow political spectrum in Ireland compared to radical changes in British politics over the past 30 years. Some "anomalies" in the revealed social welfare function suggests introducing transfers to the working poor.social preferences, optimal taxation, labour supply

Is the Collective Model of Labor Supply Useful for Tax Policy Analysis? A Simulation Exercise

The literature on household behavior contains hardly any empirical research on the within-household distributional effect of tax-benefit policies. We simulate this effect in the framework of a collective model of labor supply when shifting from a joint to an individual taxation system in France. We show that the net-of-tax relative earning potential of the wife is a significant determinant of intrahousehold negotiation but with very low elasticity. Consequently, the labor supply responses to the reform are entirely driven by the traditional substitution and income effects as in a unitary model. For some households only, the reform alters the intrahousehold distribution in a way that tends to change normative conclusions. A sensitivity analysis shows that the collective model would be required if the tax reform was both radical and of extended scope.Collective Model, Intrahousehold Allocation, Household Labor Supply, Tax Reform

The Measurement of Child Costs: A Rothbarth-Type Method Consistent with Scale Economies and Parents? Bargaining

We propose a new methodology to estimate the share of household income accruing to children, i.e., the cost of children. The household behavior is represented according to the collective approach. That is, each household member is characterized by speci.c preferences. Following the principle of the Rothbarth approach, the identi.cation of the children.s share requires the observation of adult-speci.c goods. Our method di¤ers from this traditional approach in that it is compatible with economies of scale as well as with parents. bargaining. In addition, it allows de.ning a new concept of child costs that takes into account economies of scale. We illustrate the method with an application on the French Household Budget Survey.Consumer Demand; Collective Model; Rothbarth Method; Cost of Children; Scale Economies; Equivalence Scales; Indifference Scales

The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data

This paper provides new evidence on the wage gap between informal and formal salary workers in South Africa, Brazil and Mexico. We use rich datasets that allow us to define informality in a relatively comparable fashion across countries. We compute precise wage differentials by accounting for taxes paid in the formal sector. For each country, we analyze how the sector wage gap varies within groups, between groups and over time. To account for unobserved heterogeneity, we use large (unbalanced) panels to estimate fixed effects models at the mean and at different quantiles of the wage distribution. We find that unobserved heterogeneity explains a large part of the (conditional) wage gap. The remaining informal sector wage penalty is large in the lower part of the distribution but almost disappears at the top. The penalty primarily concerns young workers and is found to be procyclical. We carefully investigate the robustness of these results and discuss their policy implications as well as regularities across countries.wage gap, informal sector, quantile regression, fixed effects model, selection

In Work Policies In Europe: Killing Two Birds With One Stone?

Earning an income is probably the best way to avoid poverty and social exclusion, hence the recent trend of promoting employment through in-work transfers in OECD countries. Yet, the relative consensus on the need for ëmaking work payí policies is muddied by a number of concerns relative to the design of the reforms and the treatment of the family dimension. Relying on EUROMOD, a EU-15 integrated tax-benefit microsimulation software, we simulate two types of in-work benefits. The first one is means-tested on family income, in the fashion of the British Working Family Tax Credit, while the second is a purely individualized low wage subsidy. Both reforms are built on the same cost basis (after behavioral responses) and simulated in three European countries which experience severe poverty traps, namely Finland, France and Germany. The potential labor supply responses to the reforms and the subsequent redistributive impacts are assessed for each country using a structural discrete-choice model. We compare how both reforms achieve poverty reduction and social inclusion (measured as the number of transitions into activity). All three countries present different initial conditions, including institutional environment, existing tax-benefit systems and distribution of incomes and wages. These sources of heterogeneity are exploited together with different labor supply sensitivities to explain the cross-country differences in the impact of the reforms.microsimulation, tax-benefit systems, in-work benefits, household labor supply, multinomial logit.