New Policy Brief by Michael Fuchs and Christine Lietz

Austria: Distributive Effects of Social Insurance Contributions, Income Tax and Monetary Social Benefits on the Household Level

Abstract:

In a European comparison Austria shows above-average levels of both taxation and social expenditures. The analyses carried out show that the high levels of taxation and social expenditures not only result in a redistribution from the left- into the right-hand pocket of residents but also that the vertical redistribution from the top to the bottom income groups through social insurance contributions, income taxes and monetary social benefits in sum reaches a sizeable dimension.

Cash benefits have the highest redistributive impact of the three instruments under investigation, although the redistributive impact of income taxes is also substantial. Social security contributions – owing to the upper contribution limit – even have a slightly regressive impact.

The results are part of a completed research project funded by the “Jubiläumsfonds” of the Austrian National Bank (project no. 11294). For the analyses, we used the European Tax/Benefit Micro-simulation Model EUROMOD with EU-SILC 2004 (provided by Statistics Austria) as input data.

http://www.euro.centre.org/detail.php?xml_id=1209

The Foundation for Law, Justice and Society has published the findings of its recent conference. To read them go to www.fljs.org/Socialcontract1

The Bow Group has published on its website Mark Wadsworth's paper on simplifying the tax and benefits system. In the paper Mark recommends a Citizen's Pension, and also a Basic Cash Benefit which people can choose to take instead of a tax allowance, thus creating a transition to a Citizen's Income. To see Mark's paper click here. To see the Bow Group's research in this area click here.

The Joseph Rowntree Foundation has just published The poverty trade-off: work incentives and income redistribution in Britain

Two strategies that governments have to help people on low incomes – providing them with financial support directly, and encouraging them to earn more – generally conflict. This study, by Stuart Adam, Mike Brewer and Andrew Shephard of the Institute for Fiscal Studies, provides new evidence on the trade-off. It finds that:

Two aspects of financial work incentives are important: the incentive to be in work at all, and the incentive to progress in work (i.e. increase earnings).

The researchers find that work incentives are most weakened through the withdrawal of means-tested benefits and tax credits, not through high rates of income tax. Over two million workers in Britain stand to lose more than half of any increase in earnings to taxes and reduced benefits. Some 160,000 would keep less than 10p of each extra £1 they earned.

Both incentives to work at all and incentives to earn more have strengthened, on average, since 1979. However, this strengthening has not been even over time, and work incentives have weakened on average since 2000. Not all changes in work incentives arise through reforms to taxes and benefits – wage growth and rent levels are also important, for example – but changes to income tax, employee National Insurance contributions, council tax, tax credits and benefits alone strengthened work incentives on average under the Conservatives and have weakened them under Labour.

Simulations of hypothetical changes to taxes and benefits confirm that no easy solution exists to the trade-off between improving work incentives and redistributing income. The researchers suggest that using universal benefits to redistribute income is very expensive, and that using means-tested benefits damages the incentive to work. Tax cuts tend to improve work incentives but do little to help people on low incomes directly. They suggest that governments need to decide how much they want to redistribute income to low-income households, and how much they mind if people work a little less as a result.

What would be interesting would be to see a discussion of our own set of results in relation to a small Citizen's Income.

In August the Joseph Rowntree Foundation published Flatter taxes: Rich giveaway or new deal for the poor? by Donald Hirsch.

This paper explores the possibility of turning tax credits into a negative income tax, with the consequence that across the earnings spectrum everyone will experience the same withdrawal rate.

The final section of this paper describes calculations of what such a flat tax system might mean for tax rates, and the effects on net incomes. Researchers at the Institute for Fiscal Studies made these calculations, funded by the Joseph Rowntree Foundation. They show that the main gainers from such a system would be families with children on modest to middle incomes, while the main losers would be the highest earners without children.

Donald Hirsch concludes:

"An across-the-board flat tax may not be the best solution, and would be extremely difficult to sell to the electorate in the form shown here. However, the characteristics of a genuinely flat marginal rate at which income is recouped by HM Revenue and Customs serve to illustrate potential benefits of reform, which might be achieved in other ways. It is beyond the scope of this paper to explore details of other reforms that could achieve similar purposes. However, as a final reflection, it is worth noting that a universal rather than income-tested form of tax credits, with income-testing restricted to the levying of the main income tax on individuals principally through PAYE, looks particularly attractive at the present time. It would solve at a stroke the problem of the complexities and administrative tangles that have plagued our present system of tax credits."

The Compass website now has on it a Thinkpiece on Citizen's Income. To see it, click here

Parliamentary support for a Royal Commission on income maintenance

The Citizen's Income Trust has issued a press result on the results of its survey of MPs' views. To see the press release, click here.

Bauman and the Radicalisation of the Citizen's Income debate

This paper by Ian Orton introduces an important thinker to our readers and asks some serious questions about some of the basics of the Citizen's Income debate.

A particular revenue-neutral Citizen's Income Scheme

Using Family Expenditure Survey data for Great Britain for 2003, POLIMOD (a modelling programme maintained by Holly Sutherland at the Microsimulation Unit at the Department of Applied Economics at the University of Cambridge) analyses the effects of changes to the tax and benefits system. For the purposes of this exercise only revenue-neutral possibilities were considered, i.e., so that the changes create neither a net gain or a net loss to the exchequer; and only schemes which require the minimum of administrative change were considered in order to facilitate an easy transition.

Click here to see the results

Tax/benefit model tables, April 2004

The Department for Work and Pensions reports that the April 2003 version of the tax/benefit model tables are now available on their website at http://www.dwp.gov.uk/asd/asd1/TBMT_2004.pdf

These tables show net income after taxes and include benefits/tax credits for various types of family with one or no earner. They show marginal deduction rates from each extra £1 in earnings and replacement ratios.

A proposal for a Citizen's Pension
The National Association of Pension Funds proposes a Citizen's Pension