Abstract
Tax benefits targeted to low-wage workers have become very common transfer programs that seek to meet both efficiency and equity targets. An expanding literature has assessed the effects of these policies on income distribution and labor supply showing important implications for female labor participation. In this paper, we estimate the distributional and behavioral impacts of a simulated new benefit in Spain based on the replacement of the existing working mother tax credit (WMTC) using as a reference the US Earned Income Tax Credit (EITC). We simulate the effects of the proposed scheme using EUROMOD and a discrete choice model of labor supply. Our results show that the enhancement of the proposed reform would have significant and positive effects both in terms of female labor participation and inequality and poverty reduction. The introduction of this benefit would generate a substantial increase in labor participation at the extensive margin and a non-negligible reduction at the intensive margin.
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Notes
In terms of allowing them to change their labor supply, although not all of them will be affected by the reform.
Most women working full-time pay enough contributions to receive the benefit.
A similar result was found by Brewer (2001) for the US. The reason why this happens is because people might interpret this payment as an extra salary for holidays or special expenditures.
Saez (2002) suggests that, when behavioral responses are concentrated along the intensive margin, the best scheme is a traditional means-tested benefit with a substantial guaranteed income support and a large phase-out tax rate. By contrast, when behavioral responses are concentrated on the extensive margin, the optimal scheme is a transfer program with negative marginal tax rates at low income levels and a small guaranteed income.
The impact of the WTC is affected by the Child Tax Credit (CTC), making the combination of the two a more complex proposal to be simulated as compared to the EITC.
Family-based tax benefits are more common in Anglo-Saxon countries, whereas Belgium—the so-called “Employment Bonus”, a rebate on low skilled social security contributions—and France—“La Prime Pour l’Emploi”, a tax credit for low-income households—have implemented individual tax benefits. Family income-based eligibility rules and their interactions with other features of the tax-benefit system make the analysis of their impact on work incentives quite complex. In general terms, individual tax benefits ultimately promote work incentives, whereas family-based tax benefits tend to discourage the labor participation of second earners.
Considering children’s ages is important in the design of tax benefits, as households with younger children usually show stronger behavioral responses. Blundell and Shephard (2012) studied the optimal design of these policies for low-income families and highlighted the importance of including age in the design of the incentives.
Given their different labor behaviors, only women aged 18–60 except self-employed and disability pensioners are included within the scheme. They are not included because their different labor behavior.
In social policy debates in Spain, “mileurista” is a popular neologism that refers to a person who earns 1000 euros a month.
With the economic crisis, an important part of the lower wages fell to levels close to that minimum.
Men’s reactions have not been considered, as the proposed new policy does not apply to them. Regardless, we follow the conclusions of Bargain and Peichl (2013), who reviewed 282 estimated elasticities for OECD countries and found that elasticities are much higher for women than for men, which are positive but very small in most cases.
The classification of the regions is as follows: Region 1 = Galicia, Asturias, Cantabria; Region 2 = Basque Country, Navarre, Rioja, Aragón; Region 3 = Madrid; Region 4 = Castille and León, Castille-La Mancha, Extremadura; Region 5 = Catalonia, Valencia, Balearic Islands; Region 6 = Andalusia, Murcia, Ceuta, Melilla; Region 7 = Canary Islands.
According to our results, 66% of the marginal utilities are positive. Some authors, like Liégeois and Islam (2013), incorporate ex-ante on the likelihood function the constraint that all individuals have positive marginal utilities. Imposing such a restriction would, however, modify the behavior of the data.
Since we define three possible states in terms of the number of hours worked (0, 20 and 40 h), the estimates focus on the changes that the new tax benefit would produce in the probability of moving from one of those states to another.
Different models were estimated for single women and women cohabiting with their spouses but the estimated model in the case of the former did not converge.
Fixed costs were introduced as a disposable income reduction when women decide to work 20 or 40 h.
Most women reducing the number of hours worked are in the higher income deciles whereas the ones in the lower deciles are encouraged to entering into the labor market.
We calculate a weighted mean using the transition probabilities and the expected disposable income in the three hypothetical states (working 0, 20 or 40 h).
We use fixed poverty lines.
The poverty rate of single-parent households would decrease from 41.5 to 24.1%, and that of couples with children would decrease from 24.0 to 17.5%.
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Acknowledgements
We thank María Arrazola, Olga Cantó, Stacy Dickert-Conlin, Xisco Oliver, Jorge Onrubia, Raul Ramos, Jesús Ruiz-Huerta, three anonymous referees and the editor and many seminar participants at Alicante, Atlanta, Bucharest, Dublin, Girona, and Madrid for their helpful discussions and comments. Financial support for this research was provided by the Ministerio de Economía y Competitividad (ECO2016-76506-C4-3-R) and Comunidad de Madrid (S2015/HUM3416). The results presented here are based on EUROMOD version G4.0 and Spanish ECV 2014. EUROMOD is maintained, developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex, in collaboration with national teams from the EU member states. We are indebted to the many people who have contributed to the development of EUROMOD. The process of extending and updating EUROMOD is financially supported by the European Union Programme for Employment and Social Innovation “Easi” (2014-2020). The results and their interpretation are the authors’ responsibility.
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Ayala, L., Paniagua, M. The impact of tax benefits on female labor supply and income distribution in Spain. Rev Econ Household 17, 1025–1048 (2019). https://doi.org/10.1007/s11150-018-9405-5
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DOI: https://doi.org/10.1007/s11150-018-9405-5