Household responses to complex tax incentives
Lead Research Organisation:
Institute for Fiscal Studies
Department Name: IFS Research Team
Abstract
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Publications
Eleanor Sanderson (Author)
(2013)
Complex Tax Incentives - An Experimental Investigation
Karel Williams (Author)
(2013)
Complex Tax Incentives - An Experimental Investigation
Rowena Crawford (Author)
(2011)
Do up-front tax incentives affect private pension saving in the UK?
Rowena Crawford (Author)
(2012)
Do up-front tax incentives affect private pension saving in the United Kingdom?
| Description | The project used two distinct methologies in order to examine the issue of how complex tax incentives affect household and individual decision-making. One methodology used household data sets and econometric methods, the second methodology used an experimental, laboratory-based, setting. The results of the research have been issued in the form of two discussion papers - one based on each methodology - and disseminated through a number of presentations to academic conferences (e.g. the Royal Economic Society Annual Conference, and the Harvard University postgraduate workshop), at 'think-tanks' and similar organisations (e.g. the Institute for Fiscal Studies and the Institute of Government), and to government-sponsored events organised by HM Revenue & Customs and HM Treasury. A summary of the project's findings may best be conveyed by describing the project's two papers: In IFS working paper W12/05, Crawford, Disney and Emmerson test the hypothesis that the level of take-up of private pensions increases at the higher rate threshold for income tax, since tax relief on own income for pension contributions is given at the marginal tax rate and should be more attractive to those with higher incomes. Because, in general, richer people save more, the project tests for in particular, whether there is a discontinuity in take-up at the higher rate threshold, either because marginal incentives increase at that point or because, more generally, becoming a higher rate taxpayer has an effect on the individual's perception of the need for tax planning. The paper finds evidence of a weak change in behaviour - an increase in contributions to a retirement pension by the individual at the higher threshold, but also weak evidence of a positive response by the partner. The latter is counterintuitive in a household model of optimal tax planning but consistent with the hypothesis that hitting a higher tax threshold has a 'signalling effect' to both members of the household that they should engage in measures to reduce tax liability. However, after submitting this paper to a journal, in the light of referee's comments, we have decided that an the econometric methods used in this paper (regression discontinuity) may not be the appropriate method to obtain quantifiable outcomes, and that this requires further thought. Marginal tax rate structures affecting households should have an effect on saving incentives, but these prove quite hard to tease out of the data. The companion paper, published by our collaborator Johannes Abeler (University of Oxford) with colleague Simon J?ger, uses a real-effort laboratory setting to examine the issue of tax complexity and non-linear tax structures. Subjects decide on how much effort to exert in two decision-making settings where they receive a piece rate and face a number of 'taxes'. In one treatment, the tax regime is simple; in the second the tax regime is highly complex. However the pay-off maximising effort level and the incentives around the treatment are identical. When new tax treatments are introduced into the experiment, require effort adjustments, subjects respond to the new optimum in the simple treatment but often re-choose their previous effort level in the complex case, thereby accentuating the effects of the reform. This result confirms several other studies (including, inter alia, Disney, Emmerson and Wakefield Economica 2009) that responses to tax reforms are highly dependent on the nature and complexity of the tax structure being implemented. |
| Exploitation Route | The main users of such research would be HMRC and HMT with a view to designing evaluations studies of tax reforms. These results will help in the design of tax policy and also in the evaluation of tax policy. Specifically, the research reinforces some well-established arguments to the effect that less complex tax systems are more likely to lead to behavioural responses by households than more complex ones. Second, by adopting both econometric and laboratory-based methods to evaluate tax structures, the project will assist in providing methods for tax evaluation that could be utilised by, for example, HMRC and HMT when evaluating specific tax programmes. |
| Sectors | Communities and Social Services/Policy,Financial Services, and Management Consultancy,Government, Democracy and Justice |
| URL | http://people.exeter.ac.uk/gdmyles/GDM.html |
| Description | There are two main outputs that we see in the main future. First, we have some specific findings concerning the effect of differential marginal tax rates on retirement saving behaviour within the UK tax and tax credit system that will bear directly on tax policy - for example in terms of the debate over the structure of tax reliefs - for example, as to whether tax reliefs should be given at the individual's marginal (income) tax rate or at the basic rate. Our (to our knowledge, novel) findings on the impact of the higher rate of income tax on the probability of retirement saving have already been fairly widely disseminated. Second, we would like to bring together the econometric and non-experimental evidence to bear on the wider questions posed by the project: the extent to which individuals understand, and respond to, complex (e.g. non-linear) tax structures; the extent to which people's behaviour is governed by inertia or approximation; and the extent to which individuals behave differently (in 'elasticity' terms) in relation to 'large' and 'small' changes in the tax structure which they face. |
| First Year Of Impact | 2011 |
| Sector | Financial Services, and Management Consultancy,Government, Democracy and Justice |
| Impact Types | Societal,Economic,Policy & public services |
| Description | Academic conference presentation on 'Wage regulation and the quality of police officer recruits' |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Other academic audiences (collaborators, peers etc.) |
| Results and Impact | The presentation stimulated discussion and questions afterwards. The discussion was useful for developing the working paper on the same subject. |
| Year(s) Of Engagement Activity | 2015 |
| URL | http://www.ifs.org.uk/publications/7938 |
| Description | Do up-front tax incentives affect private pension saving in the UK |
| Form Of Engagement Activity | Participation in an activity, workshop or similar |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Other academic audiences (collaborators, peers etc.) |
| Results and Impact | Presentation at seminar |
| Year(s) Of Engagement Activity | 2011 |
| Description | Police recruit quality and wage regulation |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Local |
| Primary Audience | Other academic audiences (collaborators, peers etc.) |
| Results and Impact | This talk was gvein by Richard Disney at Sussex University on 20 May 2015. The seminar was intended to discuss findings of the results with other academics. |
| Year(s) Of Engagement Activity | 2015 |
| URL | http://www.ifs.org.uk/uploads/Presentations/Disney_20_05_2015.pdf |
| Description | Police recruit quality and wage regulation |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Policymakers/politicians |
| Results and Impact | This was a seminar given at the Home Office on 23 April 2015. The talk was to inform the Home Office about our findings on recruitment and wage levels in the police force. |
| Year(s) Of Engagement Activity | 2015 |
| URL | http://www.ifs.org.uk/uploads/Presentations/Disney_23_04_2015.pdf |
| Description | Police recruit quality and wage regulation |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | National |
| Primary Audience | Professional Practitioners |
| Results and Impact | This was a talk at the College of Policing in Harrogate, given by Richard Disney on 19 May 2015. The talk was given to explain the results of our research to police professionals. |
| Year(s) Of Engagement Activity | 2015 |
| URL | http://www.ifs.org.uk/uploads/Presentations/Disney_19_05_2015.pdf |