Evaluation of the reduction in the child and youth benefit based on income

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In this evaluation, the labour supply effects are examined in the short term of the reduction in child and youth benefits base on income.

The child and youth benefit were made dependent on income since 2014, so that it is reduced by 2% of the portion of the income exceeding a basic personal allowance of DKK 749,000. (level at 2017). The reduction in child and youth benefits corresponds to an increase in the tax on the last earned krone (marginal tax rate).

In order to measure whether there has been a labour supply effect, the income trend from 2012 to 2015 for families who are getting a reduction in child and youth benefit (participant group) is compared to a matched control group similar to the participant group, but with incomes just under DKK 749,000 (which is therefore not reduced in child and youth benefit). The evaluation is based on register data from the Law Model and includes a total count of the Danish population. It has only been possible to investigate the effect in the short term, since there is only available data until 2015.

Overall, two effects of the reduction in the child and youth benefit based on income are examined:

  1. Directly affected: the effect for persons with incomes above DKK 749,000, whose income gives rise to a scale down of the child and youth benefit based on income (here is referred to as the primary income).
  2. Not affected: the effect on their spouse, whose income is lower than DKK 749,000, and therefore does not give rise to a scale down of the child and youth benefit based on income (here is referred to as the secondary income).

The empirical experience and economic theory largely indicate that the labour supply can be expected to fall at a higher marginal tax rate.

Main results

The evaluation generally finds that the reduction in the child and youth benefit based on income has reduced the labour supply (measured by income) for those directly affected by the reduction based on income (primary income). The estimated effect thus has the same sign as empirical experience and economic theory indicate. However, there is uncertainty associated with the results, and the results found are not statistically significant in all estimates, i.e. the results do not indicate with certainty that the reduction in the child and youth benefit based on income has had a labour supply effect within the relatively short period considered in the survey.

However, for self-employed persons (i.e. persons with income from their own business), there are greater and more certain effects on the labour supply.

With regard to the spouses (secondary incomes), the evaluation finds no statistically significant effect on the labour supply.

A number of robustness checks have been performed which do not change the overall results of the analysis.

There may be several possible explanations for that the estimated effects in the main study are not statistically significant for all the estimates. It has only been possible to investigate the effect of the reduction based on income in the short term (equivalent to two years). It is possible that the effects may be greater in the longer term as it may take some time for the full behavioural effects of changes in the tax system to manifest.

Furthermore, it cannot be excluded that the persons concerned (primary incomes) are less aware of the reduction in the child and youth benefit based on income if the spouse (the secondary income) receives the child and youth benefit. This can also help to curb the labour supply effect.

The evaluation also examines whether the reduction in the child and youth benefit based on income causes the bunching of income around the threshold of reduction and income shifting over time. It has not been possible to find results that support this.

The study is commissioned by the Danish Ministry of Taxation.

Links

Højbjerre Brauer Schultz (2017): "Evaluering af indkomstaftrapningen af børne- og ungeydelsen".

Contact

ESBEN ANTON SCHULTZ

ESBEN ANTON SCHULTZ

PARTNER, PH.D. (ECONOMICS)