Journal Articles

How taxes and welfare benefits affect work incentives: a lifecycle perspective

Date: 07 July 2017
Authors:
Publisher: Wiley
Published in: Fiscal Studies
JEL classification: H24, I24, I38, J22

Personal taxes and benefits affect the incentive to work over the lifecycle by altering income-age profiles, insuring against adverse shocks, and changing the returns to human capital. In this paper, show how a lifecycle perspective alters our impression of how the UK tax and benefit system affects women's work incentives. Given that actual longitudinal data conflates age effects, cohort effects and policy effects, and, in the UK, is not available covering the full lifecycle, we use simulated data produced by a rich, dynamic structural model of female labour supply and human capital that incorporates family formation and fertility. We find that individuals experience considerable variability in work incentives across life that outweighs the variability across individuals. Changes in the presence of children and a partner, as well as the level of any partner's earnings, are key to explaining these patterns: work incentives vary dramatically depending on family composition and the earnings of any partner, especially for the lower-skilled – with women's own earnings explaining less than a seventh of the variation in work incentives – and most women experience a number of different family types during the course of their lives.