Getting the Poor to Work: Three Welfare Increasing Reforms for a Busy Germany

42 Pages Posted: 22 Aug 2015

See all articles by Robin Jessen

Robin Jessen

Free University of Berlin (FUB)

Davud Rostam‐Afschar

University of Mannheim - Accounting and Taxation

Viktor Steiner

Free University of Berlin (FUB)

Date Written: July 1, 2015

Abstract

We study three budget-neutral reforms of the German tax and transfer system designed to improve work incentives for people with low incomes: a feasible flat tax reform that provides a basic income which is equal to the current level of the means tested unemployment benefit, and two alternative reforms that involve employment subsidies to stimulate participation and full-time work, respectively. We estimate labor supply reactions and welfare effects using a microsimulation model based on household data from the Socio-Economic Panel (SOEP) and a structural labor supply model. We find that all three reforms increase labor supply in the first decile of the income distribution. However, the flat tax scenario reduces overall labor supply by 4.9%, the reform scenario designed to increase participation reduces labor supply by 1%, while the reform that provides improved incentives to work full-time has negligible effects on overall labor supply. With equal welfare weights, aggregate welfare gains are realizable under all three reforms.

Keywords: Flat Tax, Basic Income, Work Incentives, Poverty, Microsimulation

JEL Classification: H31, I38, J22, C25

Suggested Citation

Jessen, Robin and Rostam-Afschar, Davud and Steiner, Viktor, Getting the Poor to Work: Three Welfare Increasing Reforms for a Busy Germany (July 1, 2015). SOEPpaper No. 781, Available at SSRN: https://ssrn.com/abstract=2648121 or http://dx.doi.org/10.2139/ssrn.2648121

Robin Jessen (Contact Author)

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

Davud Rostam-Afschar

University of Mannheim - Accounting and Taxation

Mannheim, 68131
Germany

HOME PAGE: http://rostam-afschar.de/

Viktor Steiner

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

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