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One of the evidence that was reached at hours of work does not respond particularly strongly to the financial incentives created by tax changes for men. The decision to take up a job that is that is entitled to taxation is quiet sensitive to women and mothers. However, the control group (single women without children) is sufficiently different from the treatment group and with such high participation rates that this puts into question the ability of the approach to control for overall trends and thus credibly to estimate the effects of the reform.
This chapter provides an overview of the voluminous literature relating tax and the supply of effort that has developed since the Meade Report (Meade,1978) on the UK tax system thirty years ago, with a focus on the empirical consensus on how taxes and benefits affect incentives.
Our starting point is the traditional view of labour supply, where hours of work and participation in work are the key measures of effort supplied by individuals. We discuss the way that economists think about labour supply conceptually. We begin by imagining a simple world in which individuals have completely free choice over their hours of work. We then take into
account important real-world features of the labour supply choice, including fixed costs associated with working, the complications created by the benefits system, how labour supply choices evolve over time and how decisions take place in the context of the family. We discuss what such thought experiments tell us about the effects of tax reform on work behaviour.
We then discuss the 'New Tax Responsiveness' literature which takes a more general view of effort and does not assume that it can be perfectly measured by hours of work supplied. Here the focus is on how people's taxable income responds to the marginal tax rate they pay on every extra pound earned. This approach recognizes that hours worked are not a very good measure of effort for people with high levels of autonomy on the job and who already work long hours, such as the self-employed or senior executives. This literature typically uses a 'difference-in-differences' approach, which compares the taxable income of groups affected and not affected by a particular change in the tax system, before and after the change takes place. This leads to several problems because of the impact of temporary changes in income, long-term trends
in the income distribution, and the interrelationship between tax changes and pre-tax wages. Unfortunately, it is not clear whether these complicating factors mean that the extent to which labour supply responds to tax changes is overstated or understated. Efforts to take account of these factors are important, but because the specifics of each tax change are different, it is difficult to generalize from any one of them. This can be seen by applying a consistent methodology across the full range of tax reforms in the twentieth century. Finally, we discuss the impact that taxes and benefits can have on longer-run outcomes which affect standards of living, such as education and training choices. These effects should be taken into account in analyzing or designing any tax and benefit system. After discussing the theory, we summarize the relevant empirical estimates and the methodology underlying the studies. Our conclusion is that hours of work do not respond particularly strongly to the financial incentives created by tax changes for men, but they are a little more responsive for married women and lone mothers. On the other
hand, the decision whether or not to take paid work at all is quite sensitive to taxation and benefits for women and mothers in particular. Within this chapter we present new estimates for both married and single men based on the numerous reforms over the past two decades in the UK. We find that the decision whether or not to work by low education men is somewhat more
responsive to incentives than previously thought. For men with high levels of education, the work decision is very unresponsive. The amount of taxable income they earn does seem to be responsive, but more because they shift their income and spending into non-taxable forms than because they reduce their work effort. This is economically costly.
Summarise the shortcomings of the existing benefits and welfare system identified by the document titled '21st Century Welfare.
Due to the rate at which the economy is changing, the systems that are in place have experienced numerous shortcomings. For example, there is the rising cost of state support. Dependency on welfare program has become a major problem with huge cost for both the claimant and the wider society. More often than not multiple agencies use valuable to gather and manage the same information in very similar ways. The system overpayment tends to hit the poorest real hard while underpayments make customers without entitlements. Rather than solve the problem of poverty and social exclusion the welfare program is creating a sprawling bureaucracy.
The state is currently experiencing increase in the support cost as even able bodied people are looking up to the state for help. For instance, currently 12 million working age citizens are benefiting from the welfare program. This is costing the government eighty five billion pounds every year. This money can be used in a more constructive ways or helping the needy and elderly citizens. A big percentage of families remain poverty stricken when the parents enter job yet, a sizable chunk receive working tax credit. The system is at fault for failing to tackle intergenerational change. The fact that a great number of teenagers grow up in workless environment increases the chances of them leading a life stricken with poverty. The higher the number of parents suffering multiple disadvantages such as low income, lack of qualifications and poor health the higher the chances that their children will suffer the same.
The other shortcoming as highlighted is the failure of the system to generate positive behavioural effects. The complexity and the limited financial incentives that the system gets is a factor that leads to worklessness. The state of being workless has a strong nexus to poverty, poorer physical and mental health and even increase in crime rate. The fact that the more deserving people may be locked out of the system, it leads to crime as the victims have to make the ends meet. The system can also make working incentives being poor. The higher the number of parents suffering multiple disadvantages such as low income, lack of qualifications and poor health the higher the chances that their children will suffer the same. Earnings disregard is a state where how much you earn does not affect the much you will get as benefits. This will promote laziness amongst the workers due to the fact that their benefits will not be affected unless they so much. They will put absolutely no effort to increase their earnings. The fact that if one works more hours earns more will lead to their benefits being deducted will make people more and more reliant on the welfare system. The system does not encourage customers to be working hard. This is because the at least there are entitled to a certain claim in the long run.
The system is too complex. Attempts to amend the system to meet immediate priorities have resulted in numerous ill-fitting changes contributing steadily to the complexity. This complexity makes it difficult for the people to decide on the best benefit and tax credit system to embrace. Complexity of the system undermines trust and in the long run customers lose interest in work. Also, it creates confusion thus some customers may fail to take up their entitlements. Transition between work and benefits can cause severe financial hardships and emotional stress. The complexity may hinder the few that use English as their second language. There is also factor of complexity in delivery. Due to the fact that customers deal with multiple agents it stands to reason that the system is complex. It asks for too much unproductive time and entails a lot of paperwork which makes is even more complicated. Customers may be required to go through a tedious process more than once trying to communicate changes. It may also cause unnecessary customer contacts. If there is change of work the delay in delivery may affect crucial support. Delay can also cause negative experiences of the entire system. Overpayments made may cause a rift. This is because a few may not be in a position to cope with fluctuations.
Summarise the proposed changes to the welfare and benefits system with reference to the document 'Universal Credit: welfare that works' and other documents available on the Department of Work and Pensions (DWP), Her Majesty's Revenue and Customs (HMRC), Directgov websites and any other publication which are relevant.
Due to susceptibility of the current benefit system, adaption of the universal credit will reduce scope of fraud and it is much easier to understand. Under the universal credit, it will enable trace people through their real time earning system rather than the through them. It will also facilitate people to save more of their earnings. It will help reduce risks in the following ways; it will help reduce complexity and supporting staff. The introduction of universal credit will help reduce complexity by replacing an array of working-age benefits. It will enhance more understanding among the staff and the recipients thus reducing the chances of error caused through complicated interactions. It is also expected that it will be administered and processed using an integrated computer system and processing team thus driving out much of the fraud and error. Through this it will be easier because one can get much of the information via the internet thus reducing time to consult with the customer service. It will be also help in the retrieval of documents.
Knowing people's real circumstances is another proposed change that would enhance welfare and benefit system. It is an important aspect of any organisation to really know and understand their customers. Understanding ones customers will help in very many different ways. Under this system, having knowledge of the customers will help in avoiding errors. Lack of knowledge on a customer's earning currently leads to the highest number of error and fraud. Although sometimes the error may be deliberate and fraudulent, some other times it may originated from typing error or due to the complexity of the system. Through the real time earning system the chances of having misreported earnings is minimized. This will help the in the fact that you will have timely and accurate information of the different people earnings. It also helps in reducing the over reliance of self-based reports. As well as reducing fraud cases it eases the process of feeling in lengthy income forms for the recipients. It also goes a long way in helping the customer receive correct level of support.
Making work pay is another proposed change. It helps one to have maximum benefit even for those small amounts of work. The benefits for any long term recipient are very positive. Through the small amount works one can refresh his skills, gain valuable experience and rebuild the confidence while being assured of benefits later on. Under the current system it discourages small amount of work. It may also encourage working as people will be less worried about fraudulent cases occurring. It will also help people relying on benefit schemes to earn as they look for a way out. This will gradually increase earned income thus reducing support. It will play a major role in making people comply with the rules rather than commit fraud. Government introduction new error and fraud strategies will help tackle areas falling outside the scope of universal credit program. It also helped lay down the necessary infrastructure so as to help in protecting integrity of the universal program.
Renewal of the Department's program will go a long way in helping to fight with fraud. Introduction of a fifty pounds civil penalty will help in keeping the correct information on any given customer. It will also help the recipient to be more serious with their claims. So as to avoid more fraud cases, if a recipient is found to be a victim, and there is enough ground to institute criminal charges the recipient will be required to pay a hefty penalty to avoid them. It will also make the recipient lose four weeks benefit payments. Introduction of reliable mechanisms to help recover fraud debts more effectively is also another proposal. Deductions of up to a quarter of ones savings is another. Introduction of a fast tracking system will be used upon those who moved off their benefits but are victims of court-authorised deduction. They will seek to recover their debt by deducting money from employee's earning.
Summarise the criticism which has been published by different organisations and in the press about the proposed changes to the benefits and welfare system.
With implementation of the universal credit program nearing the program is receiving wide range of criticism. The government proposed regulations for single benefit payment are causing concern. The lack of any system of extended payments for people taking up work is a real concern. The current benefits system allows people taking up a job after more than six months' unemployment to receive an extra four weeks in benefits to smooth their transition. The new regulations do not provide the same level of support. Extended payments are the most effective work incentive in the current benefit system. There are one-off costs associated with moving into work: purchasing suitable clothing, travel costs and so on. This period can prove particularly expensive for those who have been have been out of the labour market for some time. Transition payments also help people to deal with some of the budgeting worries that a return to work can create, especially where wages are paid a month in arrears leaving a long break between starting employment and new staff seeing their first wages.
It is expected that more than 1 million people who work and claim benefits may be required to work even harder or risk losing new universal credit. The state's capacity to ask more of those in work and those that are self-employed is likely to be transformed by the introduction of universal credit in April, the ministers said at a Policy Exchange event.
Lord Freud, the welfare minister, said: "The fact that those in work will come under the ambit of the JobCentre Plus for the first time as a result of universal credit gives the government radical new opportunities."Those in work currently face no obligations within the system to increase their hours in work and the system offers them no incentives to do so either. People on low wages can lose up to 96p in every £1 they earn as they increase their hours in work."
He claimed that as a result employers told him their staff did not want to work longer hours for fear of losing benefits. He cited B&Q as one firm that had told him their staff repeatedly requested not to work longer hours for fear of losing benefit: "This conversation is replicated in company after company."He claimed work incentives under universal credit will be as much as 12 times more generous, as recipients will retain more of their extra income. Critics say that the system will penalise those who can't increase their hours. Hoban said that as part of the drive to keep part-time workers in work for longer, he proposed these workers could receive monthly statements telling them how much better off they would be if they increased their hours, as well as receive texts telling them how much they will benefit from working longer hours, or getting better-paid work through developing higher skills. He said new demands could also be placed on the self-employed, pointing out that the tax credit system as it stands allowed people to pursue hobbies, earn nothing and subsidise their income through state support "without any expectation that they will increase their earnings and move towards self-sufficiency. This flies in the face of a principled welfare system". The latest phase in DWP thinking came as the think tank Policy Network published separate comparative international polling showing little support in Britain for a shift away from a traditional welfare state to one more similar to Northern Europe, where spending is focused on supporting working families and early years. The scale of the threat to the coalition's universal credit scheme (UC) has been revealed by figures showing that the IT system required to match employers and banks' records is failing 25% of the time. Fears that the centrepiece of government welfare reform will not be ready have led to repeated negative Treasury briefings about the problems facing the Department for Work and Pensions. Labour released the figures as a riposte to claims by the work and pensions secretary, Iain Duncan Smith, that Labour oversaw the creation of a tax credit system that allowed fraud and error to mushroom.
It was the latest salvo in a bitter political battle on welfare before this month's vote on whether benefits should rise by only 1% for the next three years. Labour has all but vowed to vote for a rise in line with inflation. The shadow work and pensions secretary, Liam Byrne, and his deputy, Stephen Timms, have fought a campaign to prove that the complex technology necessary for UC is not ready, and that the system will not create the promised incentives to work. Duncan Smith has virtually staked his political reputation on delivering the system on time and on budget. Labour's latest blast pointed to an admission by the Treasury secretary, David Gauke, that the system underpinning UC failed for over a quarter of pilot cases in November. Labour said Gauke's answers to a parliamentary question showed that in half a million cases that month, the IT system could not match wage payment records correctly, and claimed that Revenue & Customs "will have to decide to make universal credit payments on the basis of incomplete, or plain wrong, information". Timms said: "Universal credit is now in real danger of arriving in universal chaos. This scheme is supposed to launch this year, but the RTI [real-time information] system is getting more than a quarter of transactions wrong. This scheme is now in danger of an IT meltdown. If ministers don't urgently act to fix this soon millions of families' tax credits will be put at risk."