Taxes, Benefits and Labour Market Responses: New Evidence for Ireland.

September 12, 2003

News

12/09/2003

 

Taxes, Benefits and Labour Market Responses: New Evidence for Ireland.

Embargo Friday 12 September, 2003 at 00:01 am.

Authors: Tim Callan, Richard Layte, Arthur Van Soest, John Walsh



In recent years tax cuts have been used in most Budgets as a way of improving the incentive to work and encouraging more people into employment. Views differ on how great a response can be expected to such tax cuts, but there has been little in the way of hard evidence for the Irish labour market. A new study, led by Professor Tim Callan of the ESRI, provides detailed findings on the size and nature of the Irish labour supply response to tax cuts. The ESRI study shows that the overall labour supply response to general tax cuts may be rather limited. It was estimated that

 

 

  • A cut in the standard rate of tax of almost 3 percentage points would lead to a rise in participation rates for married men and women of about half a percentage point.
  • Increases in allowances or band-widening with the same exchequer cost would have effects on a similar scale, as would a top rate tax cut.

A reform of the tax treatment of married couples, along the lines of the “individualisation of tax bands” introduced in Budget 2000, was found to have a much greater impact at lower Exchequer cost. If the revenue raised from individualisation were used to cut tax rates, then

 

 

  • Married men’s participation would remain roughly constant, while
  • Married women’s participation would rise by up to 3 percentage points.
  • This is a large change on a one-off basis, but it is small compared with the 30 percentage point rise in married women’s participation over the past 20 years.

Underlying these findings is the fact that, in Ireland as in most countries, married women’s labour supply responds more strongly to financial incentives than that of married men. Most of the change in individuals’ desired hours of work came from changes in labour market participation – men tended to have a high and stable rate of participation, whereas the rate for married women was lower and more sensitive to the net gain from employment.