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Home Publications The redistribution and insurance value of welfare reform

The redistribution and insurance value of welfare reform

IFS Working Paper W14/21

Relatively little is known about the roles that taxes and transfers play in redistributing resources and providing insurance across individuals and across the lifecycle. We embed these alternative roles in a lifecycle model, allowing us to demonstrate what the tax and transfer system achieves from a lifecycle perspective and why it is valuable. We undertake a five-way decomposition of net transfers into a giveaway term and terms corresponding to between- and within-individual redistribution and between- and within-individual insurance. These components are distinguished from perspective of the start of working life, and we consider both the magnitude of net transfers involved and the associated welfare values. Our focus is on females and we also highlight how behavioural responses affect the results. Analysis is conducted for the 2015 UK tax and transfer system relative to a flat-rate baseline, showing what value is provided by the complex tax and welfare entitlement rules in a modern economy. We also consider what is achieved by two important UK benefit reforms--the working families' tax credit (WFTC) reform of 1999 and the universal credit (UC) reform that began in 2013. Our main conclusions are that insurance against wage and family composition shocks is substantial and highly valued by individuals. Within-individual redistribution (i.e. across periods of life) is generally of little value even in the presence of strict borrowing constraints. Behavioural responses tend to increase the size of reform giveaways at the expense of the other components.

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Report
Most analysis of the impact of taxes and benefits on households is cross-sectional, with individuals classified as rich or poor, and gains and losses calculated, using a single snapshot of data. In this report, we argue the case for taking a longer-run perspective.
IFS Working Paper W13/01
In this paper, we use a dynamic model to show how a lifecycle perspective alters our impression of the effect of the tax and benefit system on female work incentives.
IFS Working Paper W12/23
In this paper we look at lifetime inequality to address two main questions: How well does a modern tax system, based on annual information, target lifetime inequality? What aspects of the tranfser system are most progressive from a lifetime perspective?
Briefing note
This briefing note summarises a project that took a life-cycle perspective to understand how taxes and benefits affect incentives to work and earn more, and the way in which they redistribute income.
IFS Working Paper W15/01
We discuss two alternative approaches to constructing data on complete adult life-cycles using an 18-year panel: a splicing approach (closely related to imputation) and a microsimulation approach. We find the microsimulation approach is to be preferred because it allows us to correct for observable ...