Description
An important aspect of the tax-benefit system concerns how it balances its roles as offering insurance against downside risks (such as unemployment or illnesses), mitigating the negative consequences when these risks materialize, and redistribution. Likewise, an increasingly important dimension of inequality comes from economic insecurity. A literature on vulnerability has examined how public transfers affect the probability of falling into poverty (Chaudhuri, 2003; Calvo and Dercon, 2006) or the probability to experience welfare losses based on income or consumption (Foster et al, 2010). With a longitudinal or lifecycle perspective, the protection against income shocks offered by the tax-benefit system has been examined by measuring the extent to which post-tax and transfer income volatility is lower than pre-tax and transfer income (Bartels and Bönke, 2010; Bollinger and Zilliak, 2007), measuring the extent to which income shocks are passed into consumption shocks (Blundell et al., 2008) or decomposing taxes and transfers into an insurance part and a redistributive part (Hoynes and Luttmer, 2011). We seek to bridge these literatures in two ways.
First, using microsimulation methods, we will examine the extent to which tax-benefit systems protect the incomes of individuals experiencing adverse income shocks. We analyse hypothetical shocks by extending the “stress-testing” methodology, developed by Fernandez Salgado et al (2013) to examine unemployment, to look at changes such as a drop in earnings, family dissolution and childbirth. We will also look at how the level of protection varies by demographic and labour market characteristics. In addition, we supplement these income based measures by assessing the extent to which tax-benefit systems impact on measures of economic insecurity (Hacker et. al., 2013) after a negative income shock. The analysis will use EUROMOD- the tax-benefit microsimulation model (Sutherland and Figari, 2013) and EU-SILC. Due to the extensiveness of EUROMOD (which includes 27 EU member states), we are able to scrutinize cross-national variation in the insurance role of tax-benefit systems and establish links with the welfare state typology literature (Esping-Andersen, 1990). To capture the extent to which recent austerity reforms implemented in the wake of the “Great recession” have altered the ability of tax-benefit systems to insure adverse economic events, we analyze policies from both before (2007) and after the onset of the crisis and recovery in some countries (2013 to 2015)
Second, we complement the cross-sectional analyses outlined above with a longitudinal perspective. Using variance decomposition techniques developed in Gottshalk and Moffit (1994), we study the extent to which income fluctuations over the life-cycle are cushioned by the existence of the tax-benefit system. Unlike previous studies, we pay special attention to low-income households, who usually face both increased risk exposure and lower availability of buffers (Barrett and Carter, 2005; Blundell et al, 2008). We distinguish between permanent and transitory components of income fluctuations and compare the volatility of market and disposable (after taxes and benefits) incomes to construct a measure of the income smoothing potential of the tax-benefit system. We extend the literature by examining separately the stabilizing effects on income of various components of the tax-benefit system (such as income taxation, social insurance contributions, contributory, universal and means-tested benefits) Hoynes and Luttmer (2011) decompose the total value that individuals in the US derive from the tax-benefit system into a “redistributive value”, which relates to predictable changes in income, and an “insurance value”, which equals the tax- and benefit-based compensations for unexpected income shocks. We will extend the analysis of Hoynes and Luttmer to several European countries to study how much insurance and redistribution the system offers across the income distribution using long-running panel data in the UK (BHPS/ Understanding Society), Germany (SOEP) and Sweden (LISA administrative records). Furthermore, with long-running panels, we can better analyse how persistent these components are over time. The results would offer valuable insights for both academics and policymakers concerning the extent of the tax-benefit systems and their impact on and relative value for different groups in society.
Researchers
Professor Mike Brewer, Director of MiSoC, University of Essex, mbrewer@essex.ac.uk
Dr Silvia Avram, Senior Research Fellow, University of Essex, savram@essex.ac.uk
Ms Jekaterina Navicke, Doctoral student, University of Essex, j.navicke@yahoo.com
Professor Daniel Waldenström, Professor of Economics, Uppsala University, Daniel.waldenstrom@nek.uu.se
See full project page here