Tax and Welfare Reform: Quo Vadis Europe? - UCL

© Institute for Fiscal Studies

Tax and Welfare Reform

Richard Blundell University College London and Institute for Fiscal Studies

Slide Presentation

Quo Vadis Europe CESifo Munich

November 19th 2013

•  Focus on the labour market and earnings tax reforms.

•  Even before the recent crisis, governments around the EU faced pressure to increase employment and earnings.

•  The current recession has added to the pressure on government revenues.

•  Ask two central quesBons: •  What are the key margins where might expect reform to have

most impact on earnings and employment growth?

•  How has this changed in the light of the great recession? 1.  Key features of the labour market and earnings.

2.  Main issues with current tax systems.

3.  Prospects for improvement and coherent reform – EU 2013 Challenges for Tax Reform: coordinated ‘screening’.

Tax and Welfare Reform – Richard Blundell, UCL & IFS

Evidence on longer-term adjustments suggest •  There are common key points in the life-‐cycle where individuals are

likely to be most responsive to effecBve tax and welfare incenBves –  Derives from extensive comparaBve work across FR, DE, UK and US

–  Labour market entry, parents of younger children and older workers

•  EffecBve budget constraints are complex and oXen poorly understood –  Working age parents in France face the interacBon of more than 17 different

overlapping taxes, employer contribuBons and benefits – only 13 in UK!

•  EffecBve tax rates can be extremely high for no real good reason –  InteracBons of means-‐tested programmes at the bo]om and employer/

employee taxes /contribuBons in the middle.

•  Human capital on the job is strongly complementary with formal educaBon –  Pay-‐off to on the job experience and training is low for those with lower

educaBonal qualificaBons.

•  DifferenBal rates on similar sources of remuneraBon induce significant tax shiXing and avoidance

Points where we know employment adjusts Employment for men by age – FR, UK and US 2007

Blundell, Bozio and Laroque (2011)

Female Employment by age – US, FR and UK 2007


and for women …..

Employment rate for older workers: women aged 60-‐64

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Euro area (13 countries)

Germany (unBl 1990 former territory of the FRG)

Spain

France

Italy

United Kingdom

Employment rate for older workers: men aged 60-‐64

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Spain

France

Italy

United Kingdom


likely to be most responsive to effecBve tax and welfare incenBves –  Derives from extensive comparaBve work across FR, DE, UK and US






•  Human capital on the job is strongly complementary with formal educaBon – and maybe gehng more so –  Pay-‐off to on the job experience and training is low for those with lower



Wage profiles by education and age

Data: UK women BHPS

Source: Blundell, Dias, Meghir and Shaw (2013)


likely to be most responsive to tax and welfare incenBves –  Derives from extensive comparaBve work across FR, DE, UK and US






•  Human capital on the job is strongly complementary with formal educaBon –  Pay-‐off to on the job experience and training is low for those with lower



Recent evidence suggests •  In general workers and families are acBng as if they expect a long-‐run

fall in relaBve living standards

–  evidence from consumpBon and saving; responses in labour supply.

•  ProducBvity and capital investment have been slow to pick up

–  employment for the young/low skilled may bounce back, but what of real wages and producBvity?

•  Appears the number of rouBne jobs near the middle of the earnings distribuBon has declined steadily

–  more jobs are now professional or managerial.

•  Suggests longer term earnings growth will mostly come from high-‐skilled occupaBons, with some at the very bo]om.

•  There remain the same key points where tax systems can be reformed to enhance earnings, employment and human capital.

ProducBvity

0.92

0.94

0.96

0.98

1

1.02

1.04

1.06

1.08

2007 2008 2009 2010 2011 2012

UK, producBvity

US, producBvity

France, producBvity

Germany, producBvity

Employment shares of occupation groups: UK

© InsBtute for Fiscal Studies

Note: the discontinuities in occupation classification in 2001 and 2011 have been addressed in the following way. For the conversion of SOC 1990 to SOC 2000, we look at individuals who were surveyed in 2000Q4 and 2001Q2 and stayed with the same employer and infer the transition matrix from this group. For the conversion of SOC2010 to SOC 2000, we used the ONS two-way tabulation of the LFS 2007 Q1 sample by the major occupation groups under the two SOC systems.

Recent evidence suggests •  In general workers and families are acBng as if they expect a long-‐run

fall in relaBve living standards

–  evidence from consumpBon and saving; responses in labour supply.

•  ProducBvity and capital investment have been slow to pick up

–  employment for the young/low skilled may bounce back, but what of real wages and producBvity?

•  Appears the number of rouBne jobs near the middle of the earnings distribuBon has declined steadily

–  more jobs are now professional or managerial.

•  Suggests longer term earnings growth will mostly come from high-‐skilled occupaBons, with some at the very bo]om.

•  There remain the same key points where tax systems can be reformed to enhance earnings, employment and human capital.

Prospects for the loner term… •  SBll much to do in focussing on older workers in general, on return to

work for parents/mothers, and on entry into work.

•  There are some potenBal big gains here, –  for example, as (higher skilled) women age in the workforce.

•  Tax/welfare reforms to enhance earnings (from Mirrlees): –  refocus incenBves towards transiBon to work, return to work for lower

skilled mothers and on enhancing incenBves among older workers.

•  ProducBvity remains the key –  (financial) capital misallocaBon and potenBal investment returns.

•  Human capital and ‘on the job’ wage/producBvity complementarity –  note the relaBve importance of mismatch of entry skills in this recession.

•  ProducBvity and wages are related but note recent growth in the wedge between labour costs and hourly wages –  the growing importance of pensions and NI in the UK – future trends?

•  Current systems are unnecessarily complicated and induce too many people not to work or to work too li]le.

•  Target work incenBves where they are most effecBve –  reducing means-‐tesBng and improving the flows into work for lower educaBon mothers and maintaining work for those aged 55+.

–  at least do not increase taxes on labour at these points! –  simulaBons in Mirrlees (2011) show key increase in work/earnings.

•  Integrate overlapping benefits -‐ a single integrated benefit •  Reduce disincenBves at key margins for the educated

–  enhancing working lifeBme and career earnings profiles

–  simulaBons show significant impact on human capital.

•  Align tax rates at the margin across income sources

•  Make be]er use of social insurance and welfare accounts…..

Summary overview for the longer term....…

Figures


ProducBvity

0.92

0.94

0.96

0.98

1

1.02

1.04

1.06

1.08

2007 2008 2009 2010 2011 2012

UK, producBvity

US, producBvity

France, producBvity


Points where we know employment adjusts Employment for men by age – FR, UK and US 2007


Female Employment by age – US, FR and UK 2007


and for women …..

Employment rate for older workers: women aged 60-‐64

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Spain

France

Italy

United Kingdom


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Spain

France

Italy

United Kingdom

Wage profiles by education and age

Data: UK women BHPS


Employment shares of occupation groups: UK


Note: the discontinuities in occupation classification in 2001 and 2011 have been addressed in the following way. For the conversion of SOC 1990 to SOC 2000, we look at individuals who were surveyed in 2000Q4 and 2001Q2 and stayed with the same employer and infer the transition matrix from this group. For the conversion of SOC2010 to SOC 2000, we used the ONS two-way tabulation of the LFS 2007 Q1 sample by the major occupation groups under the two SOC systems.

Real wages by occupation group: UK


Note: the low-skilled wage would end up around the 1993 level if we use CPI instead of RPI. Each log wage series is normalized to 0 in 1993.

Components of GDP: UK


-‐20

-‐15

-‐10

-‐5

0

5

10

15

Chan

ge since 2008 Q1 (£b) Net exports

Govt. purchases

Consumer durables

Nondurable consumpBon

Corporate investment

Employment fell back differenBally.... Employment rate: men aged 25-‐29

60.0

65.0

70.0

75.0

80.0

85.0

90.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Spain

France

Italy

United Kingdom

Employer (real) contribuBons to pension funds – UK

Source: Office for National Statistics Notes: Data for Q4 2012 is not yet published so has been estimated based on Q4 2011 to Q3 2012 data


0.0

5.0

10.0

15.0

20.0

25.0

30.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Spain

France

Italy

United Kingdom

ProducBvity growth is quite different to previous recessions

90

95

100

105

110

115

120

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quarter since the labelled one

Real output per hour

1979Q4 1990Q2 2008Q1 Linear trend (90Q2-‐08Q1)

Extra Slides


Bringing it all together •  The key to improving these trends will be to focus policy

labor market entry and reBrement.

•  Enhancing the flow into work for those leaving educaBon and for returning mothers aXer childbirth, while expanding work among older workers.

•  These margins are precisely where labor supply is most responsive to tax incenBves.

•  Human capital policy has a complementary role by improving the pay-‐off to work and ensuring earnings hold up longer through adult life.


•  The evidence points towards a blueprint for a coherent and effecBve policy.

•  At a broad level key proposals would follow those in the Mirrlees Review -‐ to simplify and integrate the benefit/welfare system, target work incenBves where they are most effecBve and align rates across similar sources of income to reduce avoidance opportuniBes and broaden the tax base.

•  More specifically, tax policy should be designed to acknowledge that incenBves have been found to operate most effecBvely at certain key points in the life-‐cycle. In terms of enhancing lifeBme earnings the evidence suggests three key policy ingredients:

•  improving labour market entry -‐ for those leaving educaBon and for women aXer childbirth,

•  maintaining employment among older workers, and

•  increasing human capital investments.


•  These three ingredients can go hand in hand.

•  The path to improving long-‐term trends in employment and earnings would be to reduce disincenBves in the tax and welfare system around labour market entry and reBrement.

•  These are the margins of labor supply that have been found to be most response to tax incenBves. Improving the flows into work for those leaving educaBon and for mothers with young children, while maintaining work among those in their late 50s and 60s.

•  Reforms should recognize that early human capital investments enhance the incenBve to work and to accumulate human capital while in work, ensuring gross earnings hold up longer through the life-‐cycle. In turn, net income earned later in the working life provides an important incenBve for human capital investments.


ConsumpBon Growth


80

85

90

95

100

105

110

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

Private consum

p?on

(2008Q

1 = 100)

EU28

Germany

Spain

France

Italy

United Kingdom

United States

Labour producBvity

0.92

0.94

0.96

0.98

1

1.02

1.04

1.06

1.08

2007 2008 2009 2010 2011 2012

UK, producBvity

US, producBvity

France, producBvity


Real wages held up -‐ iniBally

0.92

0.94

0.96

0.98

1

1.02

1.04

1.06

1.08

2007 2008 2009 2010 2011 2012

UK, producBvity

US, producBvity

France, producBvity


UK, wages

US, wages

France, wages

Germany, wages

Labour producBvity

Labour productivity across countries

Average real hourly wages have also been stagnant in the UK too

95

100

105

110

115

120

0 1 2 3 4 5 6

Real hou

rly wage (first y

ear o

f recession = 100)

Years since the year in which the recession began

Average real male hourly wage (using GDP deflator)

1979 1990 2008 Linear trend 1990-‐2008

Women’s employment - UK


Family Real Incomes in the UK

100

105

110

115

120

125

1997–98=100

Mean income Median Income


Source: Family Resources Survey, various years

Employment and labour market parBcipaBon -‐ employment rate of 23-‐64-‐year-‐olds by recession

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

0 1 2 3 4 5

Year since the start of recession

male, from 1979 female, from 1979 male, from 1990 female, from 1990 male from 2008 female, from 2008

Source: LFS every year. No data point for year 1980, 1982. Quarter 2 is used for years since 1992.

Change to the proporBon of 23-‐64-‐year-‐olds who are unemployed by recession

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0 1 2 3 4 5

male, from 1979

female, from 1979

male, from 1990

female, from 1990

male from 2008

female, from 2008

Source: LFS every year. No data point for year 1980, 1982. Quarter 2 is used for years since 1992.

Documents

Tax and Welfare Reform: Quo Vadis Europe? - UCL