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International Tax and Public Finance

Erschienen in:

12.07.2019

Non-bunching at kinks and notches in cash transfers in the Netherlands

verfasst von: Nicole Bosch, Egbert Jongen, Wouter Leenders, Jan Möhlmann

Erschienen in: International Tax and Public Finance | Ausgabe 6/2019

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Abstract

We study the behavioural responses to kinks and notches in the Dutch system of cash transfers, using data on the universe of Dutch households for the period 2007–2014. We typically do not find statistically significant evidence of bunching around kinks or notches, neither in income nor in wealth. This finding is robust across different household types and modes of employment. We consider potential mechanisms that can explain this apparent lack of bunching.

Vorheriger Artikel Social networks and tax avoidance: evidence from a well-defined Norwegian tax shelter

Nächster Artikel Increasing the take-up of the housing allowance among Swedish pensioners: a field experiment

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Interestingly, Jones and Marinescu (2018) study the labour market effects of universal cash transfers paid out by the Alaska Permanent Fund and similarly find no negative effects on employment.

The bunching approach has already been applied to policies in the USA (Saez 2010), Denmark (Chetty et al. 2011; Kleven et al. 2011; Maire and Schjerning 2013), the UK (Adam et al. 2017), Ireland (Hargaden 2015), Sweden (Bastani and Selin 2014), and to tax rates in the Netherlands (Dekker et al. 2016; Bettendorf et al. 2016).

A similar result is found for the Netherlands. Jongen and Stoel (2016) exploit variation induced by the 2001 tax reform in the Netherlands, following the Gruber-Saez methodology (Gruber and Saez 2002), and find a long-run elasticity of 0.24. Dekker et al. (2016) apply the kink-based bunching approach to tax bracket thresholds in the Netherlands and find small elasticities, close to zero for singles and single parents. Couples display larger bunching, but this is due to the shifting of tax deductions from the partner with a lower marginal tax rate to the partner with a higher marginal tax rate. (The Netherlands has an individualised tax system.)

An extensive review of the bunching literature can be found in Kleven (2016).

In addition to convex kinks and notches, the housing benefit that we study also introduces a non-convex kink. Theoretically, such kinks lead to holes in the income distribution around the kink. Empirically, however, no such holes have been found. While we do not report these results in this paper directly, we did not find any holes around non-convex kinks either.

For a discussion of potential mechanisms that may mitigate the extent of bunching we observe, see, e.g. Chetty (2012), Kleven (2016), Matikka and Kosonen (2019) and Søgaard (2019).

These adjustment costs also include the cost of taking up the benefit once one becomes eligible. In our case, however, these costs are somewhat contained by the fact that households can apply for benefits online.

Søgaard (2019) also considers price misperception as a potential optimisation friction, where, for example, individuals mistakenly use average tax rates instead of marginal tax rates to calculate the net gain from earning more or less income. This seems less relevant for our case.

In our results, we have set \(y^-\) equal to €1000 to the left of the kink or notch and \(y^+\) equal to €4000 to the right of the kink or notch. Changing the values of \(y^-\) and \(y^+\), however, leaves our estimates essentially unchanged.

There also exists a cash transfer that is conditioned on the use of formal child care (Kinderopvangtoeslag). We ignore this transfer as it does not generate sharp kinks or notches in household income or wealth.

Different rules applied for younger and older people.

There is an exception for households whose rent was initially below the maximum rent threshold, but rises in subsequent years. These households do not lose their right to housing benefits as long as they do not move.

For single-person households, \(a=0.000000744662\) and \(b=0.002091986183\), while for multi-person households, \(a=0.000000419824\) and \(b=0.002140982472\). For all households, \(c=27.44\).

First, for any rent R that lies above the basic rent \(R_B(Y)\), there is full compensation for the interval between the basic rent and the first threshold, \([R_B(Y),R_1]\). Second, if a household’s rent exceeds \(R_1\) the portion above \(R_1\) and below the second threshold \(R_2\), which depends on household type, is subsidised at a rate of \(65\%\). \(R_1\) is equal to 389.05 euro in 2014. Households that consist of at most two members face an \(R_2\) of 556.82 euro, while for larger households, \(R_2\) equals 596.75 euro. Finally, in the case of single-person households there is an additional subsidy of \(40\%\) on the part of the rent that lies on the interval \([R_2,R_{max}]\).

For singles \(a=865\) and for couples \(a=1655\). For all households, \(b=0.09118\) and \(c=19,253\).

Note that this also implies a small notch at the income threshold, since the size of the healthcare benefit is still 24 euro just below the income threshold. However, we believe that this notch is too small to generate observable bunching.

MIMOSI uses data from the Income Panel of Statistics Netherlands for 2010 (approximately 100,000 individuals), uprated by CPB to the year 2014, see Koot et al. (2016).

Which in 2014 were 36.25% for the income bracket 0–19,645, 42% for the income bracket 19,645–56,531 and 52% for the income bracket above 56,531.

The general tax credit is 2103 euro which falls to 1366 on the income interval 19,645–56,495. The earned income tax credit builds up from 0 euro to 161 euro at a rate of 1.81% of each additional euro earned on the income interval 0–8913 and from 163 euro to 2097 euro at a rate of almost 20% on the income interval 8913–19,253 euro. On these intervals, the earned income tax credit has a negative contribution to the EMTR. The earned income tax credit has a positive contribution to the EMTR on the income interval 40,721–83,971 euro, where it is reduced by 4% of each additional euro earned from 2097 euro to 367 euro.

After the notch, the EMTRs drop to 50% points, somewhat more than for childless singles because of the phase-out of the child benefit.

For the housing benefit, the relevant income is the total income earned by everyone living at the same address. When discussing the housing benefit, we use the terms ‘household’ and ‘address’ interchangeably. While strictly speaking only the latter is correct, in most cases the two terms overlap and are identical.

See Tempelman et al. (2011, 2016) for an analysis of non-take-up behaviour in the Netherlands. For the housing benefit, they estimate a non-take-up percentage of \(18\%\) among those eligible.

The same is true for each individual year, see the supplementary material.

For 2011 and 2012, we downrate the wealth threshold from 2013 to 2011 and 2012, respectively, using the CPI.

Using the Gruber-Saez methodology, Jongen and Stoel (2016) estimate an elasticity of taxable income of 0.12 (using a 5-piece spline in base year income to control for, e.g. mean reversion) to 0.22 (using log base year income to control for, e.g. mean reversion) for the income range 10 to 50 thousand euro, using data from the period 1999–2005.

Chetty et al. (2013) demonstrate the importance of households’ understanding of the EITC in determining their labour supply. Feldman et al. (2016) show how households’ behaviour is at least partly driven by confused beliefs about the EITC. It is not too far a stretch to think that lack of knowledge and confusion plays a role in labour supply around the kink and notch of the Dutch housing benefit.

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Titel: Non-bunching at kinks and notches in cash transfers in the Netherlands
verfasst von: Nicole Bosch
Egbert Jongen
Wouter Leenders
Jan Möhlmann
Publikationsdatum: 12.07.2019
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 6/2019
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-019-09555-8

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