Countries are ranked by the share of income compensated. Notes: The unemployment shock corresponds to an increase in the unemployment rate such that the total household income decreases by 5%. Share of income compensated by the tax benefit system in the case of an unemployment shock. Rather than work incentives (as discussed in the previous section), they reflect how much the tax-benefit system absorbs (market) income losses due to becoming unemployed or exiting the labor market altogether.įigure 24.2. Automatic stabilizers in the case of an unemployment shock are basically replacement rates for a transition from employment to nonwork at the aggregate level. This difference is largely explained by the higher coverage and generosity of unemployment benefits in Europe. They find that tax-benefit systems absorb a greater proportion of income variation in the EU compared to the US- 38% (EU) versus 32% (US) of the income shock and 47% (EU) versus 34% (US) of the unemployment shock (see Figure 24.2). Although the proportional income shock is distribution-neutral, the unemployment shock is asymmetric because not all households are affected. (2012) model a negative income shock in which household gross incomes fall by 5% and an unemployment shock with household income at the aggregate level decreasing also by 5%, covering both the US and a large number of the EU countries. According to their estimates, the latter varies from 31% in Spain to 57% in Denmark.ĭolls et al. Similarly, Mabbett and Schelke (2007) simulate a 10% increase in individual earnings for 14 EU countries and estimate both the responsiveness (i.e., elasticity) of various tax-benefit instruments and the overall stabilization effect of the system. They find that, over the period 1962–1995, income taxes offset between 18% and 28% of variation in before-tax income (at the aggregate level). More recently, Auerbach and Feenberg (2000) estimate the aggregate change in taxes when increasing all (taxable) income (and deductions) for each individual by 1% to measure the responsiveness of tax revenues to income changes for the US. A closely related measure captures the elasticity of tax liability with respect to changes in incomes, or percentage increase in taxes for a 1% change in income, though as Auerbach and Feenberg (2000) point out, this mainly reflects the progressivity of taxes because it does not capture whether the tax burden is high or low. Although this is very similar to marginal effective tax rates, the interpretation is different and focused on the macro-level and government revenue side rather than at the individual. 9Įstimates based on microdata go back at least to Pechman (1973), who simulated income tax revenues in the US for 1954–1971 and showed how much tax liabilities change in absolute terms compared to changes in income (at the aggregate level), characterized as built-in flexibility. Apart from this, the calculations are technically very similar to the previous group, with the main differences related to interpretation. These focus on exogenous shocks rather than individual incentives to alter labor supply. Holly Sutherland, in Handbook of Income Distribution, 2015 24.2.2.2 Indicators of Automatic StabilizationĪnother closely related group of indicators characterize how tax-benefit systems act as automatic stabilizers for income or unemployment shocks, as indicated by the extent to which (aggregate) household income or tax revenue fluctuations are moderated without direct government action.
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