Benefit Incidence with Incentive Effects, Measurement Errors and Latent Heterogeneity

Empirical studies of tax and benefit incidence routinely ignore behavioral responses and measurement errors. This paper offers an econometric method of estimating the mean benefit withdrawal rate (marginal tax rate) allowing for incentive effects,...

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Bibliographic Details
Main Authors:	Ravallion, Martin, Chen, Shaohua
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ABSOLUTE VALUE ACCOUNTING AGGREGATE INCOME ANTI-POVERTY AVERAGE INCOME AVERAGE RATE BASE YEAR BENCHMARK CASH TRANSFER PROGRAMS CASH TRANSFERS CHILD LABOR CLASSICAL ECONOMISTS DATA SETS DEMOCRACY DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DISTRIBUTIONAL IMPACT DOWNWARD BIAS ECONOMETRICS ECONOMIC BENEFITS ECONOMIC DEVELOPMENT ECONOMIC HISTORY ECONOMIC INEQUALITY ECONOMIC POLICIES ECONOMIC RESEARCH ECONOMIC REVIEW ECONOMIC STUDIES ECONOMIC TRANSFORMATION ECONOMICS ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL STUDIES EMPLOYMENT INCOME EXPECTED VALUE EXPLANATORY VARIABLES FINANCIAL CRISIS GROWTH RATES HIGH UNEMPLOYMENT HOUSEHOLD INCOME HOUSEHOLD NEEDS HOUSEHOLD SURVEY HUMAN DEVELOPMENT IMPACT ON POVERTY INCENTIVE EFFECTS INCIDENCE ANALYSIS INCOME INCOME COMPONENTS INCOME DISTRIBUTION INCOME GAP INCOME INEQUALITY INCOME LEVEL INCOME POVERTY INCOME SHOCKS INCOME SOURCES INCOME TAXATION INCOME TRANSFER INCOMES INEQUALITY INEQUALITY AVERSION INNOVATION INSURANCE LABOR FORCE LABOR FORCE PARTICIPATION LABOR MARKET LABOR MARKETS LABOR SUPPLY LABOUR LABOUR MARKET LABOUR SUPPLY LINEAR REGRESSION MEAN INCOME MEASUREMENT ERROR MEASUREMENT ERRORS NEGATIVE CORRELATION NOMINAL RATE OLD AGE OPEN UNEMPLOYMENT POLICY CHANGES POLICY DESIGN POLICY DISCUSSIONS POLICY MAKING POLICY REFORM POLICY RESEARCH POLITICAL ECONOMY POOR POOR COUNTRIES POOR PEOPLE POSITIVE CORRELATION POVERTY ALLEVIATION POVERTY GAP POVERTY IMPACT POVERTY LINE POVERTY LINES POVERTY MEASURE POVERTY REDUCTION POVERTY REDUCTION OBJECTIVE PRIVATE TRANSFERS PUBLIC ECONOMICS PUBLIC POLICY PUBLIC SPENDING RANDOM EFFECTS REDISTRIBUTION POLICIES REDISTRIBUTIVE POLICIES REDUCING POVERTY RURAL SAFETY SAFETY NET SAFETY NETS SERIAL CORRELATION SOCIAL ASSISTANCE SOCIAL DEMOCRACY SOCIAL POLICIES SOCIAL POLICY SOCIAL PROGRAMS SOCIAL SAFETY SOCIAL SECURITY SOCIAL SPENDING TARGETING TAXATION UNEMPLOYED UNEMPLOYMENT WAGES WAR WEALTH WELFARE SYSTEM WORKING HOURS marginal tax fiscal incidence optimal taxation transfers poverty
Online Access:	http://documents.worldbank.org/curated/en/2013/08/18111657/benefit-incidence-incentive-effects-measurement-errors-latent-heterogeneity-benefit-incidence-incentive-effects-measurement-errors-latent-heterogeneity http://hdl.handle.net/10986/16006

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Summary:	Empirical studies of tax and benefit incidence routinely ignore behavioral responses and measurement errors. This paper offers an econometric method of estimating the mean benefit withdrawal rate (marginal tax rate) allowing for incentive effects, measurement errors, and correlated latent heterogeneity in incidence. Under the method's identifying assumptions, a feasible instrumental variables estimator corrects for incentive effects and measurement errors, and provides a bound for the true value when there is correlated incidence heterogeneity. A case study for a large cash transfer program in China indicates that past methods of assessing benefit incidence using either nominal official rates or raw tabulations from survey data are deceptive. The program entails a nominal 100 percent benefit withdrawal rate -- a poverty trap. However, the paper finds that the actual rate is much lower, and clearly too low in the light of the literature on optimal income taxation. The paper discusses likely reasons based on the qualitative observations.

Benefit Incidence with Incentive Effects, Measurement Errors and Latent Heterogeneity

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