Taxation
In most developed countries studies have been conducted on female participation in the labour market. The main reasons for conducting studies include; women work for lesser hours and their participation in the labour market is less in comparison to male counterparts. In addition women respond highly to changes in tax rates as a result in changes in a country’s tax system. The income range elasticities are very wide for married women and are mostly larger than one and positive. The female labour supply on annual work hours conducted yields a higher and value nearer one.
This is because given more time individuals are prone to adjustment margins thus variation in annual and weekly basis. The main variables considered in the study are; some women do not participate in the labour market, taxes treatment and endogenous wages. According to the studies by Heckman considering endogenous wages and some women not participating, he finds 0.8 annual work hours of elasticity at 2000 hours and larger at lesser hours, moreover finds a perfect elasticity on weeks worked annually. Heckman assumes that education level and experience acquired affect wages and ignores the fixed cost of work which raises the labour supply elasticities. The study by Cogan (1981) who used considered fixed cost of work and other assumptions kept the same as Heckman yielded 0.
864 elasticity at 1400 work hours. Arellano and Meghir (1992) who used cross-sectional dataset and considered fixed costs, endogenous taxes, pre-tax wages and non-labour sources of income on a weekly work hour’s basis find elasticities range of 0.3-0.7 varying across different groups of individuals. Mroz (1987) studies find a statistically significant highest wage elasticities of about 0.
12 whereas a zero unearned income effect. The estimates reviewed are based on cross-sectional comparison and as a result it is realized that differences in incentives is due to education levels of individuals. In the recent studies, time-series analysis has been adopted and most of the assumptions in the earlier studies have been relaxed. For example using a time-series and using the assumption of pre and post-tax wages and allowing fixed costs and ignoring similarity of work preferences for education groups. The study find elasticity that is highest for weekly hours of work is among women with young children but for all married ones the wage elasticity is approximated at 0.13 which is a low responsiveness of work hours to marginal changes in the work incentives.
The consensus for women on annual labour supply is nearer to one. However, the results rely on cross-sectional comparisons. On the other hand, weekly hours respond much less to variations in wages with approximated elasticities ranging from 0.0-0.3. The welfare and effects of incentives on wages and taxes changes are small thus the effect in change in marginal wage is reinforced by effect of income though the effect is small.
Several studies on participation elasticities reveal that there’s a discrepancy of margin of adjustment this could help explain the difference between weekly and annual hours results. Arrufat and Zabalza (1986) found empirical evidence of 0.65 and 1.41 respectively basing on cross-sectional datasets obtained from Italy and United Kingdom. The assumption used in both studies is that they allow for tax endogeneity.
The study carried out by Pencavel over a long period of time finds elasticities range of 0.7-1.8 and the assumption is that he does not allow for tax system and uses pre-tax wage rates. However, a study by Devereux (2004) finds median family income elasticity of 0.17.
The studies by Aaberge finds out that poorer women participation in the labour market is more elastic thus revealing that participation is the likely main margin of adjustments for the poorer women. Lone Mothers Lone mothers are poor and usually face a high cost of work. The tools which have been created to fight poverty among the lone mothers in the United Kingdom are the Working Families Tax Credit (WFTC) and Working Tax Credit (WTC). Eissa & Liebman (1996) find a participation elasticity of 1.16 based on a reformed Earned Income Tax Credit in the United States of America.
However, high participation rates differences between the single women without children who are considered as control group and treatment group cast doubt on the reform. According to Meyer and Rosenbaum (2001), there are substantial effects of taxation and benefits. There’s a consensus that lone mothers have got highest participation elasticity. As a result well designed policies could attract majority of them and improve their living standards. 2. The Rising Cost of State Support The welfare maintenance cost is unmanageable in that costs outweigh benefits as a number of changes were made to make it fairer.
The expenditure on working-age benefits and Tax credits hit ?87 billion in 2009/10 from ˆ67 billion in 1996/97. There is wastage of resources in that multiple agencies are using similar techniques to collect and manage the information. In addition, error and fraud is approximated at ?5.2 billion yearly while underpayments without entitlement stand at ?1.3 billion and tax credits at ?260 million yearly.
High Rates of Welfare Dependency and Poverty Welfare dependency is an issue with spiralling social and economic costs. The system shows that 12 million working-age households receive benefits and tax credits estimated to cost more than ?85 billion yearly for instance it is estimated that in every one in four working-age adults in the UK do not work. In addition, the system has failed to address intergenerational demerits and poverty. For instance, in the EU countries UK has got a higher proportion of children brought up in workless households. The Failure of the System to Generate Positive Behavioural Effects The system gives little attention to the behaviour it generates.
The main factors making individuals unemployed is the complexity and poor financial benefits. The system changes have been unable to address the impact on issues such as well-being, poorer physical health, mental health and committing an offence. Poor Work Incentves The system affects some of the groups experiencing poor work benefits for instance lone parents working less than 16 hours a week. Individuals working less than 16 hours a week obtain little benefit. The WTC provides support on low wage individuals but one has to satisfy the minimum-hours rules to benefit from it. Tax credits improved some groups work incentives but are not sufficient.
The problems in the system have been pointed out by the Institute for Fiscal studies whereas evidence obtained from Citizens Advice service reveals negative effect the current system has on lone mothers. The Marginal Deduction Rates for working individuals in families with income-related incentives or eligible to tax credits is very high in that financial gain is little. The uncertainty of benefit system is complex when moving to a job which does not work. During transition individuals are worried if the benefits will commence quickly before they receive their first pay or getting out of the job when it does not work. Complexity of the System The various attempts to change the system have resulted in ill- fitting changes occasioned with long periods of transitional.
There are a number of benefits for instance jobseeker’s allowance, employment and support among others making it complex. Complexity results in inefficiency through numerous application processes, increased risk of error which creates an opportunity for fraud. The benefits are numerous in that individuals can obtain different benefits and which support similar needs. For instance, a lone could benefit from Income support, Housing Benefit, Council Tax Benefit among others which have their own rules and procedures. Individuals have to deal many agencies for instance about a half of the 6 million obtain benefits from the Department for Work and Housing Benefit from local authority.
Studies reveal that complexity results in people not to know tax credits and incentives to get for instance overpayments of tax credits. It is believed that complexity undermines trust of people on the system, moreover, transition between work and benefits might lead to problems such as financial hardship. The numerous agencies and benefits makes delivery complex because clients got to make numerous contacts with varied agencies. There is issue of paperwork thus a lot of time is spent dealing with clients and officials. Clients sometimes are required to communicate changes individually for instance to the pension, Disability and Careers service, Local authority among others for changes to be made. However, the information needed is requested several times thus increased costs and an opportunity for error and fraud.
Delays in payment sometimes occur when individuals move to another work resulting in claims stop and start while the reassessment of the entitlement. This might interfere with important support such as in-work Housing Benefit and Council Tax Benefit.Delays arise from awarding and reassessing clients’ entitlement creates negative effects of the service. The overpayments greatly affect those clients who are not able cope with frequent changes due to low income levels. 3.
Proposed Changes Each adult will be placed into their own conditionality group with appropriate requirements in a household. In the case of a couple with children, the couple will need to choose which of them the lead career is. The main focus is to remove income-related rules and brings contributory jobseeker’s allowance regulations into line with Universal Credit on labour market requirements. Another change is to make the benefits and tax credits system fairer and simpler by: Creating the right incentives to get more people into work Protecting the most vulnerable in our society Delivering fairness to those claiming benefit and to the tax payer. Currently, jobseekers will be required to actively seek and avail themselves for work. In addition, continuous regular checks will be carried out to ensure recipients are meeting their conditionality requirements.
Hardship payments will be available to benefit recipient in need who receive a sanction. There is consideration of replacing the current hardship payments system with loans to the extent that is as effective as possible. This ensures that those who persistently fail to meet the requirements imposed upon them cannot depend on these alternative sources of support for the whole period of their sanction. There is also a need to implement income support which will enable motivate people to increase their income. On the other hand, this will increase the number of hours for work to help them in achieving their financial independence from the state.
It is proposed that income-related Employment and Support Allowance is replaced. In this case, the amount sanctioned under Universal Credit will be highly equivalent to that which will be sanctioned as per the current benefits system. People will bedevil into groups and sub-groups reflecting the four conditionality levels as follows: Keeping in touch with the labour market. Lone parent or lead career in a couple with a child over one but below the age of five forms the recipients who will be in this group. They will have to attend periodic interviews to discuss their plans for their return to the labour market. Full conditionality.
Recipients including Lone parents and couples with older children will use this group as their default option. The same requirements will apply to these recipients to actively seek for work and avail themselves for work as they would under Jobseeker’s Allowance. No conditionality. This group will have recipients who are disabled or have a serious health condition which prevents them from working and preparing for work; a lone parent or lead career in a couple with a child younger than age one; or have intensive and regular caring response. Conditionality will also not be subjected to people receiving universal credit but earning above the relevant threshold.
Work preparation. Only disabled or have health conditions will be in this group. This means that they have limited capacity for work at the ccurrent time. They will be expected to take reasonable measures to prepare for work. A small group of recipients will be required to engage in full-time activity which will give them the opportunity to demonstrate their compliance with the Jobseeker’s regime. If a recipient fails without good cause to attend or complete the placement, a significant financial sanction will be imposed; that is withholding Jobseeker’s Allowance for at least three months.
There is need for introduction of a new sanctions structure that will apply across jobseeker’s allowance, employment and support allowance and income support. Having clear sanctions are critical to incentivize benefit recipients to achieve their duties as per now. It is believed that some sanctions are set at low level and the outcomes of failing to comply with requirements are not always clear. The current proposals for financial sanctions include: Failure to actively seek employment or avail for work will lead to holding of payment for four weeks for a first failure and up to three months for subsequent failure. There is improvement of the methods of ensuring some recipients such as single parents’ whereabouts and comply to their responsibilities since some of them with young children, are only required to attend work-focused interviews. Their failure to attend is more often due to challenging circumstances than intentional evasion of the rules.
However, a financial sanction will be imposed where necessary that is broadly in line with current arrangements. Failure to meet requirements to prepare for work will lead to full ceasing of payments until the recipient meets the requirements and for a fixed period after re-compliance. 4. According to a number of criticisms, the proposed changes require adoption of a new and powerful information technology system. This proves to be a big challenge.
Government information technology systems do not have the best of records. With no computers, it will be difficult for mere people to consider the benefit system. With the current system being more complicated than it is expected, the government has decided to make it easier by integrating most means-tested benefits for working people. However, for the proposed changes, the regulations for calculating universal credit will remain complicated. According to the Institute of Fiscal Studies, the payment of the fact council tax benefit will be done separately leading to the risk of complexity and lack of transparency that the government claims is striving to reduce.
The proposed changes will lead to a rush of rules and regulations to prevent people from claiming who earns too much. On the other hand, critics argue that it has created some incentives for people to depend on benefits instead of taking jobs.A variety in people’s lives is also another part of the complexity. Another aspect is the loosening of universalism whereas the more the means testing, the more complicated it becomes. Many governments have imposed more sanctions and added conditions.
According to the proposed changes the tax credits are supposed to help make work pay, research by the Institute for Fiscal Studies (IFS) shows that those who rely mostly on benefits like the poorest families face a steep reduction of benefit when they get to work. The first announcement of child benefit changes was in 2010 spending review which proposed that the benefit from any house hold with higher rate tax payer should be withdrawn such that those earning above ?42,475 a year will be affected. However, according to the criticisms this would penalize some single-parent or sole-earner households unfairly, the proposals were altered to do away with the benefit from households with a parent earning above ?60,000. There is much concern about the impact of these proposals on individuals’ learning disabilities and mental health problems as they are often the most vulnerable members of society. The welfare system should protect and support individuals especially when they are at their most vulnerability level and empower them to lead lives of their choice. Focus by some critics turned to the failure by the government to carefully address their proposal for welfare reform before they are implemented.
Those who benefit with all forms of disabilities might face uncertainty, anxiety, stress and a sense of unfairness. Most of the individuals participating in social insurance programs do so because it is a legal requirement. It is only in a few programs that a small minority group may be allowed to choose whether to participate or not to participate. Poverty and social exclusion as well as employment are the surest guarantees of avoiding poverty. However, tax and transfer policies still play a big role in moving many out of poverty.
Nevertheless there is still poverty especially among the persistently unemployed and under employed. Preventing Dependency Since it was so difficult to make welfare recipients self sufficient, there was growing pressure that more effort should be put in to prevent dependency. Therefore, this suggests that paying attention over a wide range of issues, which includes denying job opportunities for the unskilled and widespread deficiencies in the education system. However, this may probably lead to welfare dependency, which has received special attention, rising in the level of out-of-wedlock child bearing especially among the youths, and low levels of fathers’ support to their children. According to the changes, the government claims that there is no individual who will lose out with the introduction of Universal Credit.
However, the rules will already have been made by the point the government claims there will be no cash losers. This is clearly worrying for anyone who depends on such benefits. There is concern about the way in which the disabled people would be affected by being reassessed continually for the new Personal Independence Payment, which will take over in place of Disability Living Allowance. There is also criticism to the changes in housing benefit which could suggest that individuals can no longer afford their available housing. As a result, they are forced to migrate to rather cheaper houses away from their friends and relatives and where there children study.
