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Exploring the importance of incentive responses for policy projections

  1. Justin van de Ven  Is a corresponding author
  1. National Institute of Economic and Social Research, United Kingdom
  2. University of Melbourne, Australia
Research article
Volume 10(3) Winter 2017
Cite this article as: J. van de Ven; 2017; Exploring the importance of incentive responses for policy projections; International Journal of Microsimulation; 10(3); 134-164. doi: 10.34196/ijm.00168
7 tables

Tables

Table 1
Projected effects of policy counterfactuals on annual government budget, distinguished by year and accommodated behavioural response (£2016, billions).
income tax rates rise 10% retirement benefits fall 20% income tax rates rise 10% retirement benefits fall 20%
response* response*
none emp full none emp full none emp full none emp full
net government revenue benefits expenditure
2016 33.5 39.5 41.7 16.6 15.7 17.3 0.9 0.5 0.5 −20.1 −19.8 −19.7
(0.4) (0.4) (0.3) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.1) (0.1) (0.1)
2021 33.0 40.0 44.4 19.0 18.1 19.3 1.5 0.4 0.6 −23.0 −22.6 −22.3
(0.5) (0.4) (0.4) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)
2026 32.4 39.9 45.1 22.4 21.3 22.1 1.5 0.3 0.7 −26.4 −26.0 −25.5
(0.4) (0.4) (0.4) (0.2) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)
2036 31.0 39.6 47.1 33.7 31.4 31.8 2.0 0.0 0.9 −37.3 −36.9 −36.0
(0.4) (0.4) (0.5) (0.2) (0.2) (0.2) (0.2) (0.1) (0.1) (0.2) (0.2) (0.2)
2046 36.6 44.0 54.9 46.8 42.8 43.9 2.1 −0.3 1.1 −50.2 −49.7 −48.6
(0.5) (0.5) (0.5) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1) (0.2) (0.2) (0.2)
income tax revenue consumption tax revenue
2016 40.9 46.3 44.9 −0.1 −0.9 −1.3 −6.5 −6.3 −2.7 −3.4 −3.1 −1.1
(0.4) (0.4) (0.3) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2021 41.2 46.7 48.7 −1.0 −1.6 −1.8 −6.7 −6.3 −3.6 −3.1 −2.9 −1.1
(0.5) (0.4) (0.5) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2026 40.9 46.6 50.1 −1.2 −2.0 −2.2 −7.0 −6.4 −4.2 −2.8 −2.7 −1.1
(0.4) (0.4) (0.4) (0.2) (0.1) (0.1) (0.0) (0.1) (0.0) (0.0) (0.0) (0.0)
2036 41.0 46.9 53.3 −1.1 −2.8 −2.9 −8.0 −7.3 −5.3 −2.6 −2.7 −1.3
(0.4) (0.4) (0.5) (0.2) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0)
2046 48.8 53.0 62.6 −0.6 −3.9 −3.3 −10.0 −9.2 −6.6 −2.7 −3.0 −1.4
(0.5) (0.5) (0.5) (0.2) (0.1) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0)
  1. *

    “none” = projections omitting behavioural responses to policy incentives; “emp” = projections allowing for labour supply responses to policy incentives; “full” = projections allowing for labour and savings responses to policy incentives. Standard errors reported in parentheses. “income tax rates rise 10%” denotes counterfactual in which the marginal rates on all taxable income are increased by 10 percentage points. “retirement benefits fall 20%” denotes counterfactual in which all state retirement benefits are reduced in value by 20 percentage points.

  2. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

Table 2
Projected effects of policy counterfactuals on aggregate domestic sector finances, distinguished by year and accommodated behavioural response (£2016 billion, unless otherwise stated).
income tax rates rise 10% retirement benefits fall 20% income tax rates rise 10% retirement benefits fall 20%
response* response*
none emp full none emp full none emp full none emp full
equivalent full time employees (’000) consumption expenditure
2016 −1481.6 −491.8 −574.9 307.8 237.9 160.8 −43.0 −41.8 −18.7 −22.4 −20.6 −7.5
(21.1) (7.4) (9.8) (10.7) (7.6) (5.6) (0.3) (0.3) (0.2) (0.1) (0.1) (0.0)
2021 −1300.9 −459.6 −345.1 284.4 194.7 148.5 −44.6 −42.0 −24.9 −20.8 −19.7 −7.7
(18.5) (11.4) (12.3) (13.1) (10.3) (8.4) (0.3) (0.3) (0.2) (0.1) (0.1) (0.1)
2026 −1198.7 −435.1 −218.9 321.6 183.0 153.0 −46.9 −43.1 −29.0 −19.1 −18.5 −8.0
(19.4) (16.0) (14.4) (14.9) (10.6) (9.7) (0.3) (0.4) (0.3) (0.1) (0.1) (0.1)
2036 −1186.1 −500.0 −124.6 396.1 173.9 173.3 −54.4 −49.5 −36.1 −18.2 −19.0 −9.5
(20.1) (17.7) (17.8) (14.8) (13.0) (11.4) (0.4) (0.4) (0.3) (0.2) (0.2) (0.2)
2046 −1081.9 −614.6 −156.1 430.4 105.6 176.9 −68.3 −62.4 −45.7 −19.2 −21.5 −10.8
(20.3) (17.5) (14.2) (19.2) (12.1) (12.1) (0.5) (0.5) (0.4) (0.3) (0.3) (0.2)
private income disposable income
2016 −33.1 −15.2 −17.4 7.9 5.3 3.5 −70.7 −59.1 −61.8 −13.8 −14.9 −15.8
(0.7) (0.4) (0.4) (0.3) (0.3) (0.2) (0.6) (0.5) (0.5) (0.2) (0.2) (0.1)
2021 −34.2 −15.3 −13.1 8.0 6.1 3.0 −71.5 −59.4 −61.4 −15.7 −16.3 −18.3
(0.6) (0.5) (0.5) (0.4) (0.3) (0.2) (0.6) (0.5) (0.5) (0.3) (0.2) (0.2)
2026 −37.0 −16.5 −12.6 11.3 8.1 3.6 −74.0 −60.7 −62.7 −16.0 −17.6 −20.8
(0.7) (0.6) (0.5) (0.6) (0.4) (0.3) (0.7) (0.7) (0.7) (0.4) (0.3) (0.2)
2036 −47.7 −23.9 −15.1 18.9 11.3 4.8 −84.3 −68.4 −68.7 −20.2 −25.0 −29.7
(0.8) (0.8) (0.7) (0.6) (0.4) (0.4) (0.7) (0.7) (0.7) (0.5) (0.4) (0.4)
2046 −61.7 −40.0 −25.0 27.2 12.3 6.5 −105.1 −90.0 −87.5 −25.4 −35.5 −40.5
(1.2) (0.9) (0.8) (0.7) (0.6) (0.5) (1.2) (0.9) (0.8) (0.6) (0.7)(0.6)
pension wealth non-pension wealth
2016 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
(0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2021 −35.8 −36.4 −8.6 45.8 25.4 17.4 −102.1 −48.6 −175.9 41.4 39.2 −37.8
(2.1) (1.4) (1.7) (2.4) (1.6) (1.4) (2.4) (1.4) (1.8) (2.3) (1.7) (1.5)
2026 −69.2 −77.0 −9.1 89.5 50.7 34.4 −206.7 −103.7 −326.9 83.5 72.8 −78.4
(2.9) (1.7) (2.4) (3.2) (1.6) (1.5) (3.1) (2.3) (3.1) (2.7) (1.6) (1.6)
2036 −125.8 −142.3 17.6 201.1 118.8 78.6 −408.3 −220.3 −585.5 150.1 112.6 −170.7
(3.7) (2.6) (3.0) (4.0) (2.8) (2.5) (6.0) (4.0) (4.7) (4.6) (3.8) (3.2)
2046 −161.9 −211.0 56.0 366.1 210.7 140.2 −646.3 −360.4 −863.8 236.4 142.8 −280.4
(6.9) (5.8) (5.4) (8.0) (3.4) (3.0) (9.4) (6.3) (8.1) (5.9) (4.5) (4.5)
  1. *

    “none” = projections omitting behavioural responses to policy incentives; “emp” = projections allowing for labour supply responses to policy incentives; “full” = projections allowing for labour and savings responses to policy incentives. Standard errors reported in parentheses. “equivalent full-time employees” evaluated as projected change in total number of labour hours per week divided by 37. “private income” denotes income net of interest charges from all private sources. “disposable income” denotes income net of government taxes and transfers.

  2. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

Table 3
Projected effects of a 10% rise in all income tax rates on average finances of families with members born between 1981 and 1990, distinguished by lifetime income quintile, age of cohort member, and accommodated behavioural response.
response no behavioural responses labour supply labour supply and savings
qunitile lowest middle highest lowest middle highest lowest middle highest
age-band labour time per adult per week (mins)
25–44 −14 −22 −16 −2 −7 −12 −2 −6 −3
45–54 −7 −38 −29 −1 −10 −15 −1 −4 3
55–64 −3 −21 −22 −1 −4 −11 −1 0 −3
65–74 −1 −13 −15 0 −3 −5 0 −3 1
75–84 0 0 0 0 0 0 0 0 0
consumption expenditure (£ per week)
25–44 −2 −22 −54 −2 −20 −52 −1 −11 −32
45–54 −1 −23 −87 0 −19 −83 0 −16 −58
55–64 0 −14 −80 0 −9 −73 0 −11 −57
65–74 −1 −11 −72 −1 −5 −64 −1 −8 −57
75–84 −1 −9 −63 −2 −4 −53 −1 −6 −59
disposable income (£ per week)
25–44 −5 −24 −72 −1 −19 −69 −1 −23 −63
45–54 −2 −34 −148 0 −21 −131 −1 −29 −119
55–64 −1 −28 −140 0 −15 −111 0 −17 −106
65–74 −5 −31 −139 −5 −18 −109 −5 −15 −105
75–84 −10 −23 −73 −10 −17 −72 −10 −10 −73
wealth (£ ’000s)
25–44 −1 −1 0 0 0 −1 0 −3 −6
45–54 −2 −13 −30 1 −8 −26 −1 −14 −35
55–64 −2 −26 −67 0 −15 −53 −1 −17 −59
65–74 −2 −32 −91 −1 −17 −74 −1 −21 −91
75–84 −7 −41 −118 −4 −22 −94 −5 −27 −121

  1. Notes: See notes for table 1. Quintiles defined with respect to disposable family income, equivalised using the revised OECD scale, discounted, and aggregated over the life-course. All standard errors not greater than 1 unit of respective statistic. All financial statistics reported in 2016 prices. “disposable income” denotes private income net of government taxes and transfers. “wealth” denotes the aggregate of all private pension and non-pension wealth. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

Table 4
Projected effects of a 20% fall in all state retirement benefits on average finances of families with members born between 1981 and 1990, distinguished by lifetime income quintile, age of cohort member, and accommodated behavioural response.
response no behavioural responses labour supply labour supply and savings
qunitile lowest middle highest lowest middle highest lowest middle highest
age-band labour time per adult per week (mins)
25–44 0 4 4 1 3 3 0 1 2
45–54 0 6 9 0 −1 1 0 2 3
55–64 0 11 35 0 1 7 0 5 11
65–74 0 −2 16 0 1 3 0 2 11
75–84 0 0 0 0 0 0 0 0 0
consumption expenditure (£ per week)
25–44 −1 −7 −3 −1 −5 −2 −1 −1 −1
45–54 −1 −12 −5 −1 −12 −5 −1 −2 −1
55–64 −2 −8 −4 −2 −11 −11 −1 −4 −2
65–74 −24 −12 0 −24 −14 −14 −5 −11 −5
75–84 −46 −13 2 −46 −15 −15 −6 −16 −12
disposable income (£ per week)
25–44 0 2 3 0 2 2 0 1 1
45–54 1 9 13 1 5 3 1 2 4
55–64 0 19 30 0 13 12 0 5 12
65–74 −52 −32 −7 −51 −34 −25 −52 −46 −24
75–84 −81 −71 −23 −81 −74 −57 −84 −84 −62
wealth (£ ’000s)
25–44 0 4 5 0 3 3 0 1 2
45–54 2 19 18 2 14 12 1 5 6
55–64 2 34 46 2 27 25 1 10 14
65–74 0 45 86 0 36 39 −4 9 24
75–84 −14 27 77 −14 17 26 −39 −21 4

  1. Notes: See notes for table 3.

  2. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

Algorithm A.1
Computing housing-related variables.
1: Identify home-owners.
2: if home owner then
3: go to step 7
4: else
5: go to step 18
6: end if
7: Compute net housing equity.
8: Identify mortgage holders.
9: if mortgage holder then
10: go to step 14
11: else
12: go to step 16
13: end if
14: Compute mortgage debt.
15: Compute annual interest charge on mortgage debt.
16: Compute returns to gross housing equity.
17: Go to step 19.
18: Compute rent paid.
19: Evaluate council tax payment.
Table B.1
Projected effects of policy counterfactuals on annual government budget, distinguished by year and accommodated behavioural response (£2016, billions).
income tax rates rise 10% retirement benefits fall 20% income tax rates rise 10% retirement benefits fall 20%
response* response*
none emp full none emp full none emp full none emp full
net government revenue benefits expenditure
2016 52.4 45.8 41.8 17.5 17.9 17.2 0.1 0.6 0.6 −19.6 −19.6 −19.7
(0.4) (0.4) (0.4) (0.1) (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.1) (0.1)
2021 56.5 50.7 44.4 19.3 19.8 19.3 0.4 0.8 0.6 −22.0 −22.1 −22.3
(0.5) (0.5) (0.4) (0.1) (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.1) (0.1)
2026 59.4 53.1 45.2 21.8 22.4 22.2 0.6 1.0 0.7 −25.1 −25.2 −25.5
(0.7) (0.7) (0.6) (0.1) (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.1) (0.1)
2036 58.1 50.2 39.3 30.8 31.7 32.1 9.3 9.7 9.0 −35.4 −35.5 −36.2
(0.8) (0.8) (0.6) (0.2) (0.2) (0.2) (0.3) (0.3) (0.3) (0.2) (0.2) (0.2)
2046 81.2 70.1 55.4 42.0 43.4 44.3 1.6 1.9 0.8 −47.6 −47.7 −48.8
(0.9) (0.8) (0.7) (0.2) (0.2) (0.3) (0.1) (0.1) (0.1) (0.2) (0.2) (0.2)
income tax revenue consumption tax revenue
2016 52.3 46.3 45.1 −2.1 −1.7 −1.4 0.1 0.1 −2.7 0.0 0.0 −1.1
(0.4) (0.4) (0.4) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2021 58.0 52.9 48.7 −2.5 −2.2 −1.9 −1.1 −1.3 −3.6 −0.1 −0.1 −1.1
(0.5) (0.5) (0.5) (0.0) (0.0) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2026 61.8 56.3 50.1 −3.0 −2.5 −2.2 −1.8 −2.2 −4.2 −0.3 −0.3 −1.1
(0.7) (0.7) (0.6) (0.0) (0.0) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2036 70.1 63.2 53.7 −4.0 −3.3 −2.8 −2.7 −3.3 −5.4 −0.6 −0.5 −1.3
(0.7) (0.7) (0.5) (0.0) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2046 85.7 75.7 62.5 −4.8 −3.6 −3.1 −2.9 −3.8 −6.4 −0.8 −0.7 −1.4
(1.0) (0.8) (0.7) (0.0) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
  1. *

    “none” = projections omitting behavioural responses to policy incentives; “emp” = projections allowing for labour supply responses to policy incentives; “full” = projections allowing for labour and savings responses to policy incentives. Standard errors reported in parentheses. “income tax rates rise 10%” denotes counterfactual in which the marginal rates on all taxable income are increased by 10 percentage points. “retirement benefits fall 20%” denotes counterfactual in which all state retirement benefits are reduced in value by 20 percentage points.

  2. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

Table B.2
Projected effects of policy counterfactuals on aggregate domestic sector finances, distinguished by year and accommodated behavioural response (£2016 billion, unless otherwise stated).
income tax rates rise 10% retirement benefits fall 20% income tax rates rise 10% retirement benefits fall 20%
response* response*
none emp full none emp full none emp full none emp full
equivalent full time employees (’000) consumption expenditure
2016 −0.1 −515.3 −573.4 0.0 90.6 154.8 0.0 −0.1 −18.7 0.0 −0.2 −7.4
(0.0) (9.1) (9.6) (0.0) (5.1) (6.4) (0.0) (0.0) (0.2) (0.0) (0.0) (0.0)
2021 298.1 −137.0 −343.0 10.3 96.4 141.2 −8.2 −9.7 −24.8 −1.3 −1.3 −7.6
(6.4) (14.1) (13.4) (1.2) (7.0) (7.3) (0.1) (0.1) (0.2) (0.1) (0.1) (0.1)
2026 506.5 82.5 −214.9 14.4 107.5 148.1 −13.0 −15.4 −29.0 −2.5 −2.3 −8.0
(10.6) (13.1) (12.3) (1.8) (6.9) (7.1) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1)
2036 825.9 351.6 −106.3 11.3 133.2 171.6 −18.9 −23.2 −36.9 −4.8 −4.4 −9.2
(13.9) (16.3) (15.0) (1.5) (6.7) (7.9) (0.2) (0.2) (0.3) (0.1) (0.1) (0.1)
2046 940.6 433.1 −147.6 10.7 167.0 185.2 −20.7 −27.2 −44.4 −7.1 −6.1 −10.4
(14.1) (17.2) (15.8) (0.8) (9.4) (12.3) (0.3) (0.3) (0.3) (0.2) (0.2) (0.2)
private income disposable income
2016 0.0 −15.1 −17.1 0.0 1.5 3.2 −52.3 −59.8 −61.8 −17.5 −16.6 −16.0
(0.0) (0.4) (0.4) (0.0) (0.1) (0.1) (0.4) (0.5) (0.5) (0.1) (0.1) (0.2)
2021 7.2 −6.3 −12.8 −1.1 0.3 2.8 −50.9 −57.9 −61.2 −20.7 −19.8 −18.5
(0.4) (0.6) (0.6) (0.0) (0.1) (0.2) (0.6) (0.6) (0.6) (0.2) (0.2) (0.3)
2026 12.3 −3.0 −12.3 −2.2 −0.2 3.3 −50.0 −58.2 −62.5 −24.3 −23.1 −20.9
(0.6) (0.7) (0.6) (0.0) (0.2) (0.3) (0.5) (0.7) (0.9) (0.3) (0.3) (0.3)
2036 22.7 1.7 −14.2 −4.5 −1.0 4.8 −40.4 −52.5 −60.2 −36.0 −33.5 −29.8
(0.9) (1.1) (0.8) (0.1) (0.2) (0.3) (0.7) (0.8) (0.8) (0.4) (0.5) (0.4)
2046 30.4 −0.2 −23.4 −7.1 −1.1 6.4 −56.2 −74.5 −85.9 −50.0 −45.7 −40.6
(1.2) (1.1) (1.1) (0.1) (0.3) (0.5) (1.6) (1.5) (1.7) (0.4) (0.5) (0.6)
pension wealth non-pension wealth
2016 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
(0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
2021 1.7 −21.6 −7.5 0.1 3.8 17.4 −233.2 −259.3 −175.6 −83.7 −81.0 −39.3
(0.7) (1.8) (1.9) (0.1) (0.8) (1.1) (2.4) (3.1) (2.5) (0.7) (1.0) (1.5)
2026 11.1 −33.1 −5.4 0.2 7.0 32.4 −420.3 −473.5 −326.7 −171.7 −165.0 −79.9
(1.3) (2.1) (2.2) (0.2) (1.1) (2.2) (4.2) (4.3) (3.5) (1.7) (1.7) (2.2)
2036 53.9 −39.0 27.8 0.4 13.3 72.4 −681.3 −799.3 −566.0 −364.4 −344.6 −173.4
(3.3) (4.2) (3.6) (0.2) (1.2) (2.4) (5.3) (6.8) (6.2) (3.4) (3.8) (4.2)
2046 110.5 −44.2 81.4 0.6 23.8 136.2 −885.0 −1108.2 −793.1 −595.2 −549.5 −286.3
(3.9) (4.6) (4.0) (0.3) (1.7) (4.0) (7.8) (9.4) (9.7) (4.4) (5.3) (4.8)
  1. *

    “none” = projections omitting behavioural responses to policy incentives; “emp” = projections allowing for labour supply responses to policy incentives; “full” = projections allowing for labour and savings responses to policy incentives. Standard errors reported in parentheses. “equivalent full-time employees” evaluated as projected change in total number of labour hours per week divided by 37. “private income” denotes income net of interest charges from all private sources. “disposable income” denotes income net of government taxes and transfers.

  2. Source: Author’s calculations on simulated data generated using 30 separate sets of random draws.

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