Fiscal Studies

Published by Wiley
Online ISSN: 1475-5890
Print ISSN: 0143-5671
Publications
The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy whether public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies not only on cross-country differences in generosity but also on differences in the progressivity or non-linearity of pension formulas across countries. We estimate that an extra dollar of pension wealth depresses accumulated financial assets around the time of retirement by 22 cents. An extra ten thousand dollars in public pension wealth reduces the average retirement age by roughly one month which implies an elasticity of retirement years with respect to pension wealth of -0.15.
 
It has traditionally been believed that collecting survey measures of total spending necessarily involved asking a large number of questions, too many for inclusion of a comprehensive spending measure in a general-purpose survey. In this paper we report on a supplemental survey to the Health and Retirement Study that took up this challenge. We discuss issues that arise designing a survey module to collect spending data with strict time constraints, describe how the implementation in the Consumption and Activities Mail Survey (CAMS) played out, and elicit anomalies that more detailed analysis of data quality revealed. We report how we addressed some of these anomalies in subsequent waves of CAMS. Other anomalies required conducting additional randomized experiments to find what explains the observed patterns. The results highlight the tension between asking about spending using a long time frame, which exacerbates recall bias, versus using a short time frame, which risks relying on an unrepresentative snapshot of a household's spending to proxy the total for the last 12 months. An important complicating factor in deciding which goods should be put into which time frames is that there is substantial heterogeneity in the frequency of spending across households even for the same category of spending.
 
This paper presents a review of non-experimental methods for the evaluation of social programmes. We consider matching and selection methods and analyse each for cross-section, repeated cross-section and longitudinal data. The methods are assessed drawing on evidence from labour market programmes in the UK and in the US.
 
This paper examines 157 German listed corporations that had the option of changing their fiscal year to achieve a possible tax reduction in connection with the major tax reform of 2000-01. The tax reduction from a change was larger, the larger the expected profits. However, with costs of changing the fiscal year, not all firms that expect a tax reduction from a change may do so. The paper presents empirical evidence that the propensity to change the fiscal year was significantly related to the amount of expected tax savings. This suggests that the corporate tax reduction - in combination with the special German transitory provisions - induced a deadweight loss: corporations incurred a non-tax cost to avoid a tax cost. Copyright 2007 Institute for Fiscal Studies.
 
Policies which affect the balance between the public sector's assets and its liabilities have been major concerns of the last few years. Instead of a Public Sector Borrowing Requirement (PSBR), we currently have a Public Sector Debt Repayment (PSDR), and much is being made of the consequent reduction in the nominal value of the National Debt. Public sector capital spending has been under tight restraints. Significant parts of the public sector's assets have been sold through the privatisation of former public corporations like British Telecom and through the sale of council houses under the Right to Buy.
 
The gap between rich and poor has increased dramatically over the last 25 years and the incomes of the bottom 10 per cent were no higher in 1991 than in 1967 (see Goodman and Webb (1994b, this issue)). Wages are an important part of household income and the trends in the dispersion of wages mirror very closely the trends in the dispersion of income. Knowing the reasons for the changing structure of the wage distribution is thus crucial to an understanding of the trends in overall household income.
 
This article describes the changing patterns in income inequality and real living standards over the last 30 years. Whilst it is well documented that inequality has been rising since 1979,2 there is rather less information on how the pattern of inequality changed in the period up to 1979. This study is based on an analysis of detailed information on the incomes and characteristics of around 200,000 households between 1961 and 1991, and provides for the first time ever a consistent description of trends in household incomes over such a long period.
 
According to Family Expenditure Survey (FES) data, child poverty (with a poverty line defined at half mean equivalised household income) has risen markedly in Britain in the last 30 years. By 1995–96, around one in three - or 4.3 million - children were living in poor households. This compares with child poverty rates of one in ten, corresponding to 1.4 million children, in 1968. The employment position of the household is seen to be important, with over half of poor children in 1995–96 living in households with no adults in work. If an absolute, rather than a relative, poverty line is utilised, child poverty remains stagnant since the late 1970s, following a period of rapid decline from 1968, despite considerable rises in average living standards. This reveals that the income position of households with children has been falling relative to that of childless households over time. Finally, looking at expenditure patterns and comparing their trends with income-based poverty measures tends to reinforce these findings.
 
Given the last two decades' changes in the income distribution, is society as a whole now better off or worse off? This is an important question, but it is not immediately obvious that there is a straightforward and clear-cut answer to it. If inequality has increased (the Kinnock view), and yet real incomes have also increased (the Thatcher one), surely an answer will depend on which aspect one views as the most important.
 
It is widely accepted proposition that one of the aims of the UK National Health Service is to allocate health care on the basis of need. However, while there may be considerable consensus over the legitimacy of this goal, there is also considerable debate as to whether the goal has been met. If care is allocated according to need, then the corollary is, after controlling for difference in need, there should be no systematic differences in the amount of care received by persons of different ability to pay. Allocation according to need means that ability to pay should be unimportant. Thus an empirical test of whether the NHS allocates according to need is to examine horizontal equity in the delivery of health care, controlling for differences in need.
 
The author would like to thank James Banks, Richard Blundell, Andrew Dilnot, Alissa Goodman, Terrence Gorman, John Hills, Pat McGregor, Judith Payne, Marysia Walsh, Steven Webb, two anonymous referees and seminar participants at the London School of Economics and the Institute for Fiscal Studies. Finance for this research, provided by the Joseph Rowntree Foundation under its Programme of Work on Income and Wealth and the ESRC Research Centre for the Microeconomic Analysis of Fiscal Policy at IFS, is gratefully acknowledged. Material from the Family Expenditure Survey, made available by the Central Statistical Office through the ESRC Data Archive, has been used by permission of the Controller of Her Majesty's Stationery Office. All errors are the sole responsibility of the author.
 
The rapid growth in income inequality in the UK over the 1980s has excited a good deal of interest and concern. A primary reason for this concern has been the widely- drawn conclusion that the living standards of the very poorest have at best failed to keep pace with the living standards of the rest of society. This report sheds new light on the living standards debate, by considering how household expenditure has changed over the period 1979-92. Examination of the expenditure of households appearing in the Family Expenditure Surveys of 1979-92 reveals some rather different trends from the well-documented changes in household incomes.
 
There were two principal elements to the June 1979 budget. One was the very substantial reductions which were made in the higher rates of income tax. The second was the major shift from direct to indirect taxation involved in raising the standard rate of VAT from 8 percent to 15 percent while reducing the basic rate of income tax and raising the tax threshold. This paper deals with the second of these elements. We are therefore concerned only with the way in which the budget redistributed income and altered incentives and disincentives among those with incomes below the level at which higher rates of tax apply-now around £12,000 per year. This does of course cover the overwhelming majority of taxpayers.
 
Until 1988 the Government produced a series of statistics, known as 'Low Income Families' (LIF), every two years. The figures showed the numbers of people receiving supplementary benefit (SB) and the numbers not receiving SB but with incomes either below their SB line or up to 140 per cent of that line. The figures produced in 1988 (DHSS, 1988a) updated the series to the year 1985, which is the latest year for which such figures have until now been available.
 
In the earlier article (Kay and Morris, 1979), we examined the effects of the 1979 budget on distribution and incentives by looking at the tax system as a whole in terms of a 'tax credit' and a marginal tax rate. Among equal yield systems, the higher the tax credit and the higher the marginal rate, the greater the progressivity of the tax system and the size of disincentives to work. In this note we update this analysis by looking at the effect of the 1980 Budget.
 
Since the seminal work by Diamond and Mirrlees (1971), various attempts have been made to calculate optimal tax rates for different countries (e.g. Deaton (1977) for the UK and Harris and McKinnon (1979) for Canada). Other exercises along these lines are studies by Ebrahimi and Heady (1988), who examine the sensitivity of optimal tax rates to assumptions regarding separability and the availability of optimal demogrants, and those of Fukushima (1991) and Fukushima and Hatta (1989), who examine the welfare implications of a move to uniform taxation.
 
The difficulties encountered in forecasting social security expenditure (significantly underpredicted for much of the 1980s) have long been a source of concern-not least to officials in the DSS. Although official forecasts are undertaken and published primarily because they are needed for the public expenditure planning process, they should also palay a scientific role in testing the underlying theories abou the determinants of social security spending.
 
After the 1979 budget, in which the Chancellor reduced income tax but increased VAT to 15 per cent, we presented (Kay and Morris (1979)) a simple framework to describe the UK tax system. This shows that, for the majority of taxpayers, the whole tax system which comprises income tax, National Insurance contributions, VAT, specific duties and rates can be approxiamtely described by a tax credit and a marginal rate. It is as if tax is levied by the government at a single rate, and then taxpayers receive a tax credit equal to the value of personal allowances, zero rating on VAT, etc. to offset this, This is not in fact how the tax system works, but it provides a simple way of describing it.
 
From the middle of the 1980s until the end of that decade, the government experienced a growing economy and consequently buoyant tax revenues. In addition to cutting the public sector borrowing requirement (PSBR) and increasing spending, these revenues were used as a means of financing massive tax cuts, and in particular cuts in income tax rates. By the early 1990s, however,it had become clear that tax revenues had been cut to an unsustainably low level as recession led to a PSBR that threatened to run out of control. In response to this, in the two Budgets of 1993 the two Chancellors introduced a package of tax increases which, in terms of revenue raised, will reverse most of the tax reductions of the late 1980s. But taxes were increased in a way very different from that in which they were reduced. The overall effect has been a substantial reform of the UK tax system. This paper examines the changes that have been made in the tax system as they affect the personal sector, i.e. changes to taxes on personal income, on personal property and on expenditure. We start the analysis with the 1985 tax system as the base, for it was in 1986 that the first cut in income tax rates was introduced and the trend for significant tax cuts was set. And it was from this date that taxation as a proportion of GDP started to fall steadily until the end of the 1980s. We end the analysis with the tax system as it would have been left at the end of 1995 by the tax changes announced in the 1993 Budgets. A decade of contrasting tax changes are examined.
 
The Canadian federal tax reform of 1988 replaced a spousal tax exemption with a non-refundable tax credit. This reduced the'jointness'of the tax system: after the reform, secondary earners'effective'first dollar'marginal tax rates no longer depended on the marginal tax rates of their spouses. In practice, the effective'first dollar'marginal tax rates faced by women with high-income husbands were particularly reduced. Using difference-indifference estimators, we find a significant increase in labour force participation among women married to higher-income husbands. Copyright 2007 Institute for Fiscal Studies.
 
This research has been supported by the DWTC (contracts DB/01/032 and PE/VA/07) and by the Fund for Scientific Research-Flanders (contract FWO G.0327.97). This paper also forms part of the research programme of the TMR network Living Standards Inequality and Taxation (contract no. ERBFMRXCT 980248) of the European Communities, whose financial support is gratefully acknowledged. The PE contract implied joint research with the Research Department of the Ministry of Finance. The expertise of the authors of the personal income tax model, Christian Valenduc and Isabel Standaert of the Ministry of Finance, was of invaluable importance for the empirical work and is gratefully acknowledged. The authors also wish to thank Jean-Yves Duclos and Abdelkrim Araar for their useful guidelines on the implementation of the statistical inference measures, and Erik Schokkaert for comments on an earlier version of the paper. Of course, all opinions expressed in this paper and all remaining errors are the authors'.
 
Between 1988 and 1993, the Belgian personal income tax system and the indirect tax system were reformed to a considerable extent. We use microsimulation models to investigate the impact of the reform on the liability progression and the redistributive effect of the combined tax system. The redistributive effect of personal income taxes decreased, notwithstanding an increase in liability progression. For indirect taxes, both the liability regressivity and the reverse redistributive effect have been enhanced. We use recently developed statistical tests to gauge the significance of the observed changes.
 
This paper assesses the distributional impact of indirect taxes among Greek households between 1988 and 2002, a period that coincides with the introduction of significant reforms in the tax system due to EU membership. The highly differentiated indirect tax structure prevailing at the beginning of the period had distributional benefits over the more simplified 2002 tax structure. The overall inequality of the after-tax welfare distribution has increased by 6-12½ per cent and changes in the indirect tax system seem to explain about half of this increase. The paper also applies a recent method of measuring the distributional impact of relative price changes caused by changes in tax rates of commodities (Newbery, 1995) and establishes that indirect tax reforms introduced since 1988 had an adverse impact on the distribution of purchasing power, which nevertheless seems to be very small.
 
The Social Security Act 1986 allowed a wider range of pension schemes to contract out of the state earnings-related pension scheme (SERPS). Individuals now have a good idea of choice concerning their pension strategy, and an evaluation of this strategy involves some complex decision-making by individuals. One component of this choice is the tax treatment of pensions. Pensions are given a degree of 'fiscal privilege' relative to other forms of investment, such as life insurance. The issue of pension taxation, and reforms to the system of taxation, have been discussed by Fry, Hammond and Kay (1985), but this particular study preceded the major reforms introduced in the 1986 Act.
 
This year the Chancellor introduced a quiet Budget, but not a dull one. In macroeconomic terms, the modest tax cuts that the Chancellor introduced represent a slight tightening of the stance of fiscal policy. This was very much in line with our pre-Budget forecast, and was largely dictated by inflation prospects and balance of payments concerns. Our view, both-pre and post-Budget, is that this stance of fiscal policy, together with continued tight monetary policy, will slow domestic demand growth and inflation, and avert a continued deterioration in the balance of payments. The outlook, therefore, is for a soft landing for the UK economy.
 
The Budget embodies many of the recommendations that we have put forward over the last year-on personal savings and the appropriate stance of macro-economic policy- but a void remains on the key issue of Exchange Rate Mechanism (ERM) entry. With inflation set to rise above 9 percent in the short term, there is a danger that an infaltion/sterling depreciation cycle becomes entrenched. In fiscal terms, the Budget was broadly neutral and the Chancellor confirmed that the strategy is to rely on high interest rates to support the exchange rate and tame inflation. This year, with base rates of 15 per cent, we expect the pount to remain reasonably stable, but in 1991-92, as interest rates fall-which they are bound to do ahead of the election-the pound could well come under pressure, so putting the Government's inflation objectives at risk. ERM entry would provide the obvious support and is consistent with the Treasury forecast. Without it, inflation is unlikely to fall below 5 per cent next year.
 
For most of teh 1980s the focus of attention at Budget time has been on tax reform and micro-economic changes. By contrast most of the interest in the 1990 Budget was in its overall fiscal stance and its possible effect on the macro-economy. This was a natural reflection of the current state of the economy both because of the importance of getting the fiscal stance right to avoid recession on the one hand and inflation on the other, and because of the consequent lack of room for manoeuvre in cutting or reforming taxes. Nevertheless it is important not to lose sight of the micro-economic measures that were announced. In this article we shall look at the impact of the changes to excise duties and income tax that were announced, as well as the move to independent taxation of husband and wife.
 
This paper analyses low income dynamics in Britain using the first four waves of the British Household Panel Survey. There is much low income turnover: although there is a small group of people who are persistently poor, more striking is the relatively large number of low income escapers and entrants from one year to the next. Simulations using estimated low income exit and re-entry rates demonstrate the importance of repeated low income spells for explaining a person’s experience of low income over a given period. We also document the characteristics of low income stayers, escapers and entrants.
 
This article investigates NATO burden sharing in the 1990s in light of strategic, technological, political and membership changes. Both an ability-to-pay and a benefits-received analysis of burden sharing are conducted. During 1990-99, there is no evidence of disproportionate burden sharing, where the large allies shoulder the burdens of the small. Nevertheless, the theoretical model predicts that this disproportionality will plague NATO in the near future. Thus far, there is still a significant concordance between benefits received and defence burdens carried. When alternative expansion scenarios are studied, the extent of disproportionality of burden sharing increases as NATO grows in size. A broader security burden-sharing measure is devised and tested; based on this broader measure, there is still no disproportionality evident in the recent past.
 
Top-cited authors
Richard Blundell
  • University College London
Costas Meghir
  • Yale University
Monica Costa Dias
  • The Institute for Fiscal Studies
Barbara Sianesi
Lorraine Dearden
  • University College London