Family tax credits have created more couples
The governments introduction of the Working Families Tax Credit (WFTC) may have created more than 50,000 new couples, according to new research by Dan Anderberg.
His study, presented at the Royal Economic Societys 2006 Annual Conference at the University of Nottingham, finds that benefits like family tax credits and Income Support (IS) frequently subsidise or penalise the formation of partnerships according to whether two individuals are better or worse off as a couple than apart.
Anderberg finds that there is a sizeable response to these financial incentives: for example, a £100/week partnership penalty reduces the probability of having a partner by about seven percentage points.
The welfare system is widely thought to affect important dimensions of individuals’ behaviour, including how much to work, how much education to acquire and how much to save. Indeed, it may even affect individuals’ decision about whether and when to form a partnership and have children.
While there has been a vast amount of research on the effect of welfare benefits on labour supply, until now, there has been little concrete evidence available on the effect of the benefit system on family structure in the UK.
Anderbergs research defines, calculates and estimates the effects of the financial incentives for partnership formation created by the IS and family tax credit systems.
Two individuals are said to face a partnership bonus if they are eligible for more benefits as a couple than as two singles. If they are eligible for fewer benefits as a couple, they are said to face a partnership penalty.
Using a large sample of individuals drawn from the Family Resources Survey, 1995-2002, Anderberg shows that there is a wide distribution of partnership bonuses and penalties affecting the population.
The majority of individuals face some form of partnership bonus or penalty, and while in most cases, the values are small, bonuses and penalties in the range of £100/week are not uncommon. For example, 10% of all couples face a WFTC partnership bonus of at least £80/week while roughly another 10% of all couples face a WFTC partnership penalty of at least £80/week.
Using a large sample of women drawn from the Family Resources Survey, 1995-2002, Anderberg then considers how partnership bonuses and penalties affect individuals’ partnership status. He shows that a £100/week partnership penalty reduces the probability of having a partner by about seven percentage points.
Finally, he considers the effect of the 1999 WFTC reform, a key policy implemented by the Labour government. He shows that the WFTC reform encouraged partnership formation primarily by making partnership bonuses more common in the population.
Applying the estimates of the analysis suggests that the WFTC reform may have increased the partnership rate among women by 0.5 percentage points. Stated differently, the reform may have created more than 50,000 new couples.
Notes for editors: Tax Credits, Income Support and Partnership Decisions by Dan Anderberg was presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, 18-20 April. Anderberg is at Royal Holloway, University of London.
For further information: contact Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
Discover more papers from Dan Anderberg at EconPapers and IDEAS.