Bank i Kredyt. Czasopismo NBP poświęcone ekonomii i finansom. National Bank of Poland s Journal on Economics and Finance

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1 ROK XXXIX Bank i Kredy Bank i Kredy Czasopismo NBP poświęcone ekonomii i finansom Naional Bank of Poland s Journal on Economics and Finance syczeń Wspomnienie o Profesorze Zdzisławie Fedorowiczu ( ) Remembering Professor Zdzisław Fedorowicz ( ) 5 Peer Haan, Leszek Morawski, Michał Myck Taxes, Benefis and Financial Incenives o Work: The Unied Kingdom, Germany and Poland Compared Podaki, świadczenia i bodźce finansowe do podejmowania pracy. Wielka Bryania, Niemcy i Polska porównanie 34 Anna Maysek- J drych Współczesne przeobrażenia sysemu finansowego i ich konsekwencje The Conemporary Transformaion of he Financial Sysem and is Consequences 61 Jerzy Rembeza, Grzegorz Przekoa, Anna Szczepaƒska-Przekoa Analiza powiązań pomiędzy indeksami giełdowymi i wielkością obroów na Giełdzie Papierów Warościowych w Warszawie The Price-Volume Linkages on he Warsaw Sock Exchange 70 Zdzisław Fedorowicz Sanisław Flejerski, Podsawy meodologii finansów. Elemeny komparaysyki Review of he book by Sanisław Flejerski, The Foundaions of Finance Mehodology. Comparaive Sudy Elemens 75 Zdzisław Fedorowicz Zenobia Knakiewicz (red.), Współczesny pieniądz w eorii i prakyce Review of he book edied by Zenobia Knakiewicz, Conemporary Money: Theory and Pracice Europejska Inegracja Monearna (educaional inser in Polish only) Leokadia Or ziak EURO - pieniądz międzynarodowy Euro as Inernaional Money

2 Rada Naukowa/Scienific Council Peer Backé (Oeserreichische Naionalbank), Wojciech Charemza (Universiy of Leiceser), Sanisław Gomułka (London School of Economics and Poliical Science), Marek Góra (Szkoła Główna Handlowa), Marek Gruszczyński (Szkoła Główna Handlowa), Urszula Grzelońska (Szkoła Główna Handlowa), Danua Hübner (European Commission), Krzyszof Jajuga (Akademia Ekonomiczna we Wrocławiu), Barłomiej Kamiński (Universiy of Maryland; The World Bank), Jerzy Konieczny (Wilfrid Laurier Universiy), Wojciech Maciejewski (Uniwersye Warszawski), Krzyszof Marczewski (Szkoła Główna Handlowa; Insyu Badań Rynku Konsumpcji i Koniunkur), Ewa Miklaszewska (Akademia Ekonomiczna w Krakowie), Timohy P. Opiela (DePaul Universiy, Chicago), Wiold Orłowski (Niezależny Ośrodek Badań Ekonomicznych; Szkoła Biznesu Poliechniki Warszawskiej), Zbigniew Polański (zasępca przewodniczącego/depuy Chairman, Narodowy Bank Polski; Szkoła Główna Handlowa), Bogusław Pierzak (Szkoła Główna Handlowa; Narodowy Bank Polski), Wiesława Przybylska-Kapuścińska (Akademia Ekonomiczna w Poznaniu), Zbynek Revenda (Vysoká skola ekonomická v Praze), Michel A. Robe (American Universiy; U.S. Commodiy Fuures Trading Commission), Michał Rukowski (The World Bank), Sławomir Sanisław Skrzypek (przewodniczący/chairman, prezes/presiden, Narodowy Bank Polski), Adalber Winkler (European Cenral Bank), Charles Wyplosz (Graduae Insiue of Inernaional Sudies, Geneva) Kolegium Redakcyjne/Ediorial Board Pior Boguszewski, Tomasz Chmielewski, Elżbiea Czarny, Krzyszof Gajewski (sekrearz kolegium redakcyjnego/assisan Edior), Małgorzaa Iwanicz-Drozdowska, Ryszard Kokoszczyński, Adam Koronowski, Wojciech Pacho, Bogusław Pierzak (zasępca redakora naczelnego/depuy Managing Edior), Zbigniew Polański (redakor naczelny/managing Edior), Andrzej Rzońca, Cezary Wójcik, Zbigniew Żółkiewski Zgodnie z wykazem sporządzonym przez Miniserswo Nauki i Szkolnicwa Wyższego dla porzeb przyszłej oceny paramerycznej jednosek naukowych, publikacjom naukowym w Banku i Kredycie" przyznawane jes 6 punków. Wersje elekroniczne arykułów publikowanych w Banku i Kredycie" są dosępne za pośrednicwem serwisu Social Science Research Nework (hp:// Elecronic versions of he aricles published in "Bank i Kredy" are available a he Social Science Research Nework (hp:// Wydawca/Publisher Narodowy Bank Polski Konak/Conac ulica Święokrzyska 11/21, Warszawa, Poland el.: fax: krzyszof.gajewski@mail.nbp.pl hp:// Projek/Projec DOCTORAD Skład i Druk/Typeseing and prining Drukarnia NBP/Prining House of he NBP Koreka/Ediing Deparamen Komunikacji Społecznej NBP/Deparmen of Informaion and Public Relaions NBP Prenumeraa/Subscripion RUCH SA - wpłay na prenumeraę przyjmują: jednoski kolporażowe właściwe dla miejsca zamieszkania lub siedziby prenumeraora (dosawa w sposób uzgodniony). Wpłay przyjmuje Oddział Krajowej Dysrybucji Prasy RUCH SA na kono: Pekao SA IV O/Warszawa lub kasa Oddziału. Cena prenumeray ze zleceniem dosawy za granicę jes o 100% wyższa od krajowej. Zlecenia na prenumeraę dewizową, przyjmowane od osób zamieszkałych za granicą, realizowane są od dowolnego numeru w danym roku kalendarzowym. Wpłay są przyjmowane na okresy kwaralne w erminie: do na I kw. nasępnego roku, do na II kw.br., do 5.06 na III kw. br., do 5.09 na IV kw. br. Informacje o warunkach prenumeray w RUCH SA OKDP, ul. Jana Kazimierza 31/ Warszawa, można uzyskać pod el , ^ ^ Prenumeraa własna i zamawianie pojedynczych egzemplarzy: Narodowy Bank Polski - Deparamen Komunikacji Społecznej, ulica Święokrzyska 11/21, Warszawa, nakład: 1100 kono: Cenrala NBP - Deparamen Operacyjno-Rachunkowy nr kona: NBP DOR r ,00 zł, 1 egz. - 17,00 zł

3 Bank i Kredy syczeń 2008 Wspomnienie o Profesorze Zdzisławie Fedorowiczu ( ) Remembering Professor Zdzisław Fedorowicz ( ) Profesor Zdzisław Fedorowicz był wybinym polskim ekonomisą znanym w kraju i za granicą. Przedmioem badań naukowych uczynił wszyskie dziedziny finansów. Pracował jako nauczyciel akademicki w Szkole Głównej Handlowej w Warszawie, w kórej się dokoryzował, habiliował i uzyskał yuł naukowy dokora honoris causa (1999). Pełnił eż presiżowe funkcje w życiu naukowym jako członek Komieu Nauk Ekonomicznych PAN, członek Rady Głównej Szkolnicwa Wyższego, członek Cenralnej Komisji Kwalifikacyjnej ds. Tyułów i Sopni Naukowych, przewodniczący Rady Naukowej Insyuu Finansów. Był eż członkiem Międzynarodowego Insyuu Finansów Publicznych w Paryżu, członkiem Towarzyswa Uniwersyeckiego do Badań Ekonomiczno-Finansowych (SUERF) w Amserdamie, eksperem Organizacji Narodów Zjednoczonych w Egipcie, Syrii i we Włoszech. Wykładał również na Uniwersyeach w Kairze, Oranie i Paryżu. Profesor Z. Fedorowicz w swoim życiu zawodowym wiele czasu poświęcił akże prakyce gospodarczej. W laach pracował w Cenrali Narodowego Banku Polskiego na sanowiskach doradcy naukowego, zasępcy dyrekora deparamenu, doradcy Prezesa i I zasępcy Prezesa NBP. Był o okres cenralnego zarządzania gospodarką. Głęboka znajomość insrumenów zarządzania w gospodarce rynkowej uławiała szybkie rozpoznawanie błędów w insrumenach cenralnego zarządzania sosowanych w gospodarkach socjalisycznych. W ym okresie bardzo inensywnie pracował więc nad poszukiwaniem racjonalnych rozwiązań i możliwości wprowadzania ich w życie. W ym celu Profesor skupił wokół siebie grono wybinych ekonomisów spoza banku. Ich zadaniem było diagnozowanie nieprawidłowości i niewydolności działającego sysemu oraz poszukiwanie racjonalnych rozwiązań. Przykładem ego rodzaju działań są publikacje książkowe z serii Problemy eorii i prakyki gospodarczej w Polsce, wydanej w języku angielskim przez wydawnicwo PWN w laach sześćdziesiąych. Professor Zdzisław Fedorowicz was a disinguished Polish economis, known domesically and inernaionally. In his scienific life, he researched all fields of finance. He was an academic eacher a he Warsaw School of Economics where he received PhD and nex a pos-docoral degree. In 1999 he was awarded he ile of Docor Honoris Causa. Professor Fedorowicz also held a number of presigious poss as member of he Commiee on Economic Sciences of he Polish Academy of Sciences, member of he General Council for Higher Educaion, member of he Cenral Commission for Professional and Academic Tiles and Degrees and chairman of he Scienific Council of he Insiue of Finance. He was member of he Inernaional Insiue of Public Finance in Paris and member of he Sociéé Universiaire Européenne de Recherches Financières (SUERF) in Amserdam. Professor Fedorowicz also worked as a Unied Naions Organisaion exper in Egyp, Syria and Ialy and augh a universiies in Cairo, Oran and Paris. In his professional life, Professor Fedorowicz dedicaed a lo of ime o economic pracice. In he years , when he Polish economy was cenrally managed, he worked a he head office of he Naional Bank of Poland, iniially as a scienific advisor and depuy deparmen direcor, and hen as advisor o he Presiden of he NBP and Firs Depuy Presiden. His in-deph knowledge of marke economy managemen ools was crucial in he quick idenificaion of he incorrec applicaion of cenral managemen insrumens in socialis economies. Therefore, he was acively involved in developing raional soluions and ways of puing hem ino pracice. To his end, he Professor managed o bring ogeher a group of disinguished economiss from ouside he NBP o idenify cases of he malfuncioning of he exising sysem and o find raional soluions. These acions resuled in he preparaion of he book series "Problemy eorii i prakyki gospodarczej w Polsce" ["Problems of Economic Theory and Pracice in Poland"], published in English by he Polish Scienific Publishers PWN in he 1960s. Professor Z. Fedorowicz auhored he firs wo chapers Rola finansów w socjalisycznym planowaniu gospodarczym [The Role of Finance in Socialis Economic Planning] and Finanse przedsiębiorsw uspołecznionych [Finances of Socialized Enerprises] in volume 3 of Finanse i bankowość [Finances and Banking]. The conribuing auhors for he remaining

4 Bank i Kredy syczeń 2008 W omie rzecim p. Finanse i Bankowość dwa pierwsze rozdziały: Rola finansów w socjalisycznym planowaniu gospodarczym i Finanse przedsiębiorsw uspołecznionych, napisał Profesor Z. Fedorowicz. Auorami pozosałych są profesorowie SGH i przedsawiciel NBP. Na okładce czyamy: Auorzy rozdziałów zamierzali (...) zaprezenować czyelnikowi eoreyczne problemy doyczące funkcjonowania pieniądza i finansów w gospodarce socjalisycznej, jak również zasosowanie meod rozwiązywania ych problemów w Polsce. Zagadnienia e sały się przedmioem rozważań w kolejnych jedenasu wydaniach podręcznika Finanse w gospodarce socjalisycznej. Nie można pominąć akże książki wydanej w 1967 r. p. Sporne zagadnienia eorii pieniądza w gospodarce socjalisycznej, za kórą Polskie Towarzyswo Ekonomiczne przyznało Profesorowi nagrodę naukową II sopnia im. Oskara Langego. Niewąpliwie pokłosiem ej działalności organizacyjnej i wórczej była praca habiliacyjna p. Racjonalny sysem finansowy. Główne kierunki reformy, w kórej Profesor uzasadnił porzebę respekowania zasad racjonalności sysemu finansowego w każdym usroju społeczno-poliycznym. Już w pierwszym okresie ransformacji usrojowej Profesor opublikował kilka monografii z dziedziny finansów, wskazujących na możliwość wprowadzenia w Polsce rozwiązań funkcjonujących w pańswach o rozwinięej gospodarce rynkowej. Propozycje e zawarł w nasępujących książkach: Sysem gospodarczy i efekywność ekonomiczna, Podsawy eorii finansów, Teorie pieniądza, Finanse przedsiębiorswa i Poliyka pieniężna. W monografii Rynek pieniądza i rynek kapiału poddał ocenie poliykę monearną prowadzoną przez NBP w laach dziewięćdziesiąych. Wskazał na konieczność jej zmian i odpowiednie dososowanie insrumenów do akualnych sandardów w Unii Europejskiej. W ym okresie Profesor pracując w prywanych uczelniach wyższych, przygoował nowe podręczniki, wyposażając młode pokolenie ekonomisów w wiedzę niezbędną do sprawnego przebiegu ransformacji sysemowej w kraju. Z ych podręczników największe uznanie zdobyły: Międzynarodowe sosunki finansowe i Ryzyko bankowe wydane w roku Po laach należy się zgodzić z opinią Danuy Drabińskiej, zaprezenowaną w opracowaniu Pocze Dokorów Honoris Causa Szkoły Głównej Handlowej w Warszawie, że sały konak z nauką świaową zapewnił Profesorowi presiżową pozycję wśród specjalisów z dziedziny finansów. Kulura osobisa, pracowiość i wiedza Profesora budziły wśród wychowanków podziw i uczucie wdzięczności. chapers were professors of he Warsaw School of Economics and a NBP represenaive. The cover of he publicaion conains he following noe: The auhors of he chapers have inended o (...) presen o he reader heoreical problems relaed o he funcioning of money and finance in a socialis economy as well as mehods of solving hese problems in Poland. The issues were he subjec of consideraions in he nex eleven ediions of he exbook Finanse w gospodarce socjalisycznej [Finance in he Socialis Economy]. Worh menioning is also he book published in 1967 Sporne zagadnienia eorii pieniądza w gospodarce socjalisycznej [Conenious Issues of he Theory of Money in he Socialis Economy] for which he Professor was awarded he Oskar Lange second-degree scienific prize of he Polish Economic Sociey. Undoubedly, he Professor s pos-docoral disseraion eniled Racjonalny sysem finansowy. Główne kierunki reformy [A Raional Financial Sysem. Main Direcions of Reform] was he oucome of his organisaional and creaive aciviy. In he book, he subsaniaed he need o respec he principles of financial sysem raionaliy in any sociopoliical sysem. A he onse of Poland s sysemic ransformaion, Professor Fedorowicz published a few monographs on finance, in which he indicaed he possibiliy of implemening soluions funcioning in developed marke economies in Poland. These proposals were included in he following books: Sysem gospodarczy i efekywność ekonomiczna [Economic Sysem and Economic Efficiency], Podsawy eorii finansów [The Foundaions of he Theory of Finance], Teorie pieniądza [Theories of Money], Finanse przedsiębiorswa [Corporae Finance] and Poliyka pieniężna [Moneary Policy]. In he monograph Rynek pieniądza i rynek kapiału [The Money Marke and he Capial Marke] he Professor assessed he moneary policy pursued by he Naional Bank of Poland in he 1990s. He poined ou ha i was necessary o revise he policy and adjus is insrumens o he exising sandards of he European Union. While eaching a privae universiies, he Professor was working on new coursebooks wih he aim of providing he younger generaion of economiss wih experise needed in he smooh ransformaion of he Polish sysem. Of hese exbooks, Międzynarodowe sosunki finansowe [Inernaional Finance Relaions] and Ryzyko bankowe [Banking Risk], published in 1996 gained wider recogniion. Afer all hese years, one should agree wih he opinion of Danua Drabińska who wroe in he sudy Pocze Dokorów Honoris Causa Szkoły Głównej Handlowej w Warszawie [The Lis of Docor Honoris Causa Awards by he Warsaw School of Economics] ha he Professor s uninerruped conac wih world science ensured him a presigious posiion among expers in finance. The Professor s manners, diligence and knowledge evoked admiraion and graiude among his alumni. Barbara Gruszka Wychowanka Barbara Gruszka Alumnus

5 Bank i Kredy syczeń 2008 Microeconomics Taxes, Benefis and Financial Incenives o Work: The Unied Kingdom, Germany and Poland Compared * Podaki, Êwiadczenia i bodêce finansowe do podejmowania pracy. Wielka Bryania, Niemcy i Polska porównanie Peer Haan **, Leszek Morawski ***, Michał Myck **** received: 29 November 2007, final version received: 5 February 2008, acceped: 22 February 2008 Absrac We provide a deailed comparison of financial incenives o work resuling from he ax and benefi sysems in hree counries: he Unied Kingdom, Germany and Poland. Financial incenives o work are compared using a range of example family profiles under differen assumpions concerning benefi eligibiliy, wage levels and work inensiy. Consequences of he differen design of axes and benefis are discussed in deail from he perspecive of araciveness of employmen. Sreszczenie W arykule przedsawiono szczegółowe porównanie finansowych bodźców do pracy, wynikających z sysemów podakowo-świadczeniowych w rzech krajach Wielkiej Bryanii, Niemczech i Polsce. Porównano finansowe bodźce do pracy, wykorzysując przykładowe profile rodzinne, różniące się dosępem do zasiłków, wysokością płac i inensywnością pracy. Szczegółowo omówiono konsekwencje różnych srukur podakowoświadczeniowych z perspekywy arakcyjności zarudnienia. Keywords: work incenives, replacemen raios, ax and benefi sysems JEL: J21, J38 Słowa kluczowe: bodźce do podejmowania pracy, wskaźniki zasąpienia, sysemy podakowoświadczeniowe * This paper forms par of a research program on microsimulaion a he Deparmen of Economics of he Universiy of Warsaw. We graefully acknowledge financial suppor from he European Social Fund provided hrough he Polish Minisry of Labour and Social Policy in a projec eniled Microsimulaion models as ools for labour marke analysis. We are also graeful o colleagues from he IFS for making he IFS saic micro-simulaion model available o us for he exercise and o an anonymous referee for useful suggesions. The usual disclaimer applies. ** DIW-Berlin *** Universiy of Warsaw, Deparmen of Economics **** DIW-Berlin; Insiue for Fiscal Sudies, mmyck@diw.de

6 Mikroekonomia Bank i Kredy syczeń Inroducion In his paper we conduc a deailed comparison of work incenives for a large se of sylised households beween he Unied Kingdom, Germany and Poland. The hree counries may be considered as represening hree ypes of welfare regimes, which makes he comparison especially ineresing. The UK and Germany represen wo developed economies wih he laer ofen quoed as one of he mos generous welfare saes and wih he Unied Kingdom as an example of a more liberal economy, wih less a generous welfare sysem. The ax and benefis sysems in hese wo economies, and heir effecs on incenives o work, are compared o he sysem in Poland, a ransiion economy and a new member of he EU. The analysis presened in his paper shows resuls generaed using hree counry-specific saic ax and benefi micro-simulaion models, respecively: he IFS model for he Briish sysem, he STSM model for Germany and he SIMPL model for Poland. 1 Our analysis aims o demonsrae he usefulness of comparaive micro-simulaion work for he purpose of idenifying mos imporan areas for reform relaing o anipovery measures and he labour marke. While a large number of sudies have used micro-simulaion models for ha purpose (see for example Haan, Myck 2007a; Bargain, Orsini 2006; and oher sudies), so far here has been lile inernaional analysis including he ax and benefi sysem in Poland (a recen excepion is Haan, Myck 2007b) and we are no aware of comparaive micro-simulaion sudies for he hree sysems analysed here. While he ype of analysis presened in his paper is in some sense resricive, since we only look a a seleced number of sylised families, he approach we ake allows for ineresing direc comparisons beween family ypes. Moreover, he se of example families we choose is broad enough o give a very good feel of how he ax and benefi sysems in he UK, Germany and Poland affec households financial siuaion. Our analysis focuses in paricular on working-age families in he lower end of he income disribuion. This is because i is his par of he populaion for which he problems of povery alleviaion and provision of srong work incenives are especially relevan and ofen difficul o address. Therefore, he analysis of work incenives provided below looks a he financial siuaion of he example families assuming ha earners in hese families receive eiher he 10 h, he 25 h or he 50 h percenile wage. I is no surprising ha work incenives srongly relae o he level of earnings, and as we shall see in many cases he financial reward from full-ime employmen can be exremely low relaive o wha families may receive when individuals remain ou of he labour marke. 1 For more deails abou he Polish model (SIMPL) see Bargain e al. (2007). Deails of he German model (STSM) are presened in Seiner e al. (2005). The paper is srucured as follows. In Secion 2 we give an ouline of he mos imporan aspecs of he ax and benefis sysems in he UK, Germany and Poland. Secion 3 provides some informaion abou he sylised family ypes we use for our exercise and abou he assumpions we make in he calculaion of heir disposable incomes. Is Secion 4 we inroduce he way in which resuls have been presened and define replacemen raios (RRs) which are compued for he example families. Discussion of he deails of he budge consrains our example families would face under respecive ax and benefis sysems is presened in Secion 5. We focus he discussion on he key differences beween he counries as far as he sysems of means-esed benefis are concerned (Secions and 5.1.2), on he mos problemaic elemens of he sysems leading o effecive marginal ax raes in excess of 100% (Secion 5.1.3), and he consequences of means-esing on how rapidly ne incomes grow wih increasing work inensiy (Secion 5.1.4). In Secion 5.2 we provide a comparison of he main feaures of he ax and benefi sysems which are argeed on families wih children. Financial incenives o work are summarised using RRs in Secion 6, in which we show how relaive araciveness of work differs beween he hree counries. We poin o major differences beween he counries in incenives o work for lone parens (6.1) and couples (6.2). Using RRs we also sress he imporance of he effec of inwork suppor on financial araciveness for second earners (6.3). Secion 7 offers some conclusions and lessons from he analysis for ax and benefi policy in Poland. 2. Tax and Benefis sysems - deducions from employmen income and main benefis considered in he exercise Below we describe some deails of income axaion and benefi sysems in he UK, Germany and Poland paying paricular aenion o he benefis we subsequenly model in compuing disposable incomes for he example families we focus on. The descripion of income axaion focuses on axaion of earnings and includes mos imporan deails of he personal income ax and social securiy conribuions sysem. The benefis we look a are eiher universal child-relaed benefis or various forms of means-esed suppor which he families we consider could apply for. In he case of he UK we also include a descripion of work relaed means-esed paymens, he so-called in-work credis. The sysem for each of he counries is described as of This is he sysem we use o model financial incenives of he example families in all hree counries.

7 Bank i Kredy syczeń 2008 Microeconomics 2.1. The Unied Kingdom Income axaion The axaion sysem in he UK is individual, and here is no income spliing among parners. Each individual receives an income ax allowance of 4,895 pounds per year. Incomes in he range of 4,895 6,985 pounds per year are axed a 10%, hen income up o 37,295 pounds per year is axed a 22%, and all income above ha a he rae of 40%. If income exceeds he level of he ax allowance (i.e. from he level of 94 pounds per week) individuals are liable o pay naional insurance. Employees pay NI a he rae of 11% when heir earnings are lower han 630 pounds per week. On income above his, he employee rae is 1%. Employers pay Naional Insurance a he rae of 12.8% (here is no ceiling on he paymen of he employer NI). The basis for he compuaion of boh he income ax and he naional insurance is gross earnings defined as oal labour cos minus employer s naional insurance conribuions. Transfer sysem All children in he UK are eligible for he universal Child Benefi, which in 2005 was pounds per monh for he firs child and pounds per monh for each subsequen child. 2 Then depending on he family income families wih children can receive suppor hrough he Child Tax Credi (CTC). This ransfer, despie he name is no an inegral par of he ax sysem, and operaes more like a benefi. I depends on he oal family income. The maximum amoun of he CTC a family can ge depends on is composiion, and is compued as he sum of he Family Premium (45.60 pounds per monh), and credis for each child of pounds per monh. The CTC is wihdrawn a 37% of he oal gross family income over he level of 13,910 pounds per year before he basic level of he family premium is reached. This is evenually also wihdrawn, bu only once oal gross family income reaches 50,000 pounds per year (he family premium is hen wihdrawn a 6.7%). The basic means-esed benefi sysem in he UK, available o all families, is composed of four major elemens. The mos basic suppor is provided hrough Income Suppor and Job Seekers Allowance (JSA). Low income households can also obain ren rebaes hrough Housing Benefi and reducions in council ax paymens hrough Council Tax Benefi. Income Suppor is paid o poores families condiional on special circumsances (such as cerain ypes of disabiliy or being a single paren). The unemployed, who do no qualify for Income Suppor, 2 Mos values for he Briish sysem are expressed in weekly values. In his paper o make he comparison easier beween he hree counries we discuss all values in erms of monhly equivalens, aking a monhly value o be equal o 4.35 imes he weekly value. can receive he Job Seekers Allowance, a benefi of he same value as Income Suppor bu condiional on boh a fornighly confirmaion of individuals readiness o work, and a level of resources. The basic amouns of Income Suppor in 2005 were: pounds per monh for a single person and pounds per monh for a couple. Slighly lower raes apply for individuals below he age of 18. For households whose ne income exceeds 20 pounds a week, and where none of he members works more han 15 hours per week, for each 1 pound of exra ne income, he amoun of benefi paid hrough Income Suppor or Job Seeker s Allowance is reduced by 1 pound. This implies a 100% wihdrawal rae. Housing Benefi and Council Tax Benefi (CTB) can be claimed regardless of he number of hours worked, bu when household ne income exceeds he level of IS/JSA eligibiliy, for each 1 pound of exra ne income he value of he benefis is reduced by 0.65 pound. Values up o which families can claim hese benefis correspond o he values of Income Suppor, wih he excepion ha here are special premiums for children of pounds per monh for each child. These accoun for he fac ha he CTC and Child Benefi are included in he compuaion of he Housing Benefi and he CTB. Income Suppor, Council Tax Benefi, Housing Benefi and non-conribuory Job Seekers Allowance are based on weekly income assessmen and are no ime-limied. The same applies o he CTC and he Working Tax Credi we urn o below. Eligibiliy o Income Suppor in he UK ends if he number of hours worked per week exceeds 15. Then, however, individuals and families become eligible for special addiional means-esed benefis which specifically arge low paid employees. Since he 2003 reform he role of he in-work suppor benefi in he UK is played by he Working Tax Credi (WTC). Unlike he in-work suppor mechanism which preceded he combinaion of he WTC and he CTC, namely he Working Families Tax Credi, he WTC is no limied only o families wih children. However, condiions regarding he eligibiliy o WTC regarding he minimum required number of hours worked are differen for hose wih and hose wihou children. The minimum required number of hours of work for lone parens and for couples wih children is 16, while for hose wihou children he minimum is 30 hours per week. There is also an age requiremen of 18 years for hose wih children and 25 for hose wihou. The compuaion of he amoun of WTC which a family is eligible for is similar o he process concerning he CTC. The maximum amoun ha families can receive is pounds per monh for lone parens and all couples (wih or wihou children) and pounds for single individuals wihou children. On op of ha families wih children receive a full-ime bonus of pounds if eiher he lone paren or any of he parners in he couple works 30 hours per week

8 Mikroekonomia Bank i Kredy syczeń 2008 or more, The WTC is wihdrawn a 37% of gross income once income exceeds 5,220 pounds per year. In addiion o ha, parens can also apply for childcare credis o suppor heir childcare expenses. A couple o be eligible for he childcare credi needs o have boh parens working a leas 16 hours per week Germany Income Taxaion In heory, he German income ax is based on he principle of comprehensive income axaion. Tha means ha he sum of a household s income from all sources is axed a a single rae afer several deducions have been applied. In pracice, here are various excepions o his rule, however, especially regarding he axaion of capial income and pensions. Since he beginning of he 1990s, households have been paying, in addiion o he sandard income axes, he Solidariaeszuschlag a ime limied ax supplemen implemened in he course of he German reunificaion. For he year of ineres, he year 2005, he supplemen amouns o 5.5% of he sandard income ax. Anoher disinguishing feaure of he German ax sysem is he principle of join axaion of households, whereby he income ax of a married couple is calculaed by applying he ax funcion o half of he sum of he spouses incomes; his amoun is hen doubled o deermine he ax amoun of he couple. 3 Corneo (2005) provides an hisorical overview of income axaion in Germany and shows ha since he mid-1980 progressiviy of income axaion has declined. During he 1990s he German governmen implemened several minor reforms slighly reducing marginal ax raes and increasing he basis ax allowance. These reforms, however, are no comparable o he effec of he Tax Reform 2000 which deermines he ax schedule in The Tax Reform 2000 reduced he marginal ax raes for all households. For a single household, he changes in marginal ax raes are relaively similar up o abou 50,000 euros of axable income. However, when axable income reaches he op marginal ax rae he gains from he ax increase. This is due o he large drop of he op marginal ax rae from 51% o 42%. On he lower end, he increase in he ax allowance excludes households wih axable income below 7,664 euros from axaion. Before he reform, in he fiscal sysem of 2000, his hreshold was a 6902 euro. Boh, he increase in he ax allowance, and he decreasing marginal ax raes lead o a lower average ax rae over he enire disribuion of axable income. In addiion o axes, working people pay social securiy conribuions (SSCs). These include, unemploymen (6.5% of gross earnings) and healh insurance (abou 17% of gross earnings) and pension 3 Seiner and Wrohlich (2004) provide a deailed discussion of join axaion in Germany. conribuions (19.5% of gross earnings). In general, employer and employee pay half of he conribuions. The so called Mini/Medi-Job program excludes households wih earnings lower han 400/800 euros from he SSCs. Transfer Sysem The German ransfer sysem consiss of several differen income-suppor programs. These programs have differen arge groups and vary in heir design. In general, he German ransfer sysem can be characerised as a radiional welfare sysem. Mos benefis are argeed o individuals ou of work, and he benefis are mosly wihdrawn as soon as people sar working. This implies ha a he boom of he earnings disribuion, he marginal ax raes are very high, someimes close o 100%. Excep for a very minor program, he child supplemen, in Germany here are no ransfer programs condiional on work, such as in he UK or in he US. Nex, we will briefly discuss he feaures of he main ransfer programs. In his analysis we exclude he insurance based unemploymen benefis (ALG I). Unemployed, who have worked for more han 12 monhs over he las hree years, qualify for ALG I. This is a emporary benefi which depends on he previous ne-earnings (60% of previous ne income for a household wihou children). As ALG I is financed by he social securiy conribuions of he working populaion i has a differen characer han he general ax financed ransfers and is herefore excluded from his analysis. Arbeislosengeld II (Social Assisance, ALGII): ALGII is a means-esed benefi. The basic amoun for a single household is 345 euros for Wes and 331 euros for Eas Germany. A parner receives slighly less han 311 euros (Wes) and 298 euro (Eas) and for children he basic amoun is roughly 200 euros depending on age and region. In addiion o he basic amoun, he household receives suppor for housing and heaing. Thus, he major par of housing benefis is included in ALGII. ALGII is means-esed agains all sources of income - axes and social securiy conribuion are deduced including child benefis and mainenance paymens. The wihdrawal rae varies beween 70% and 85% and above 1,200 euros per monh (1,500 euros per monh for hose wih children) he wihdrawal rae is 100%. ALGII is only argeed a households which are ready o ake up work. Households wih individuals who are no par of he labour force, receive Sozialhilfe. The design of Sozialhilfe is very similar o ALGII wih a slighly differen wihdrawal rae. The main difference is ha in heory households can loose heir eligibiliy for pars of ALGII when hey are no acively looking for a job. However, his depends very much on personal and regional circumsances. Kindergeld (Child Benefi): Households receive child benefis for all children younger han 18 years. Children up o he age of 27 are eligible if hey are

9 Bank i Kredy syczeń 2008 Microeconomics in full-ime educaion. For he firs 3 children he benefis amoun o 154 euros per monh, hen for every addiional child he benefi is 179 euros per monh. Child Supplemen: The Child Supplemen is an in-work benefi for households wih dependen children younger han 18. I amouns o 140 euros and is wihdrawn a a rae of 70%. This insrumen was parly inroduced o decrease he gap of child suppor for hose in- and ou-of work. However, because of he design of his ransfer wih a phasing-in and phasing-ou range and relaively low paymens, only few households benefi from i. Housing Benefis: In addiion o he housing benefis, which are included in he ALG II, here exis general Housing Benefis (Wohngeld). The amoun of benefis depends on region, year when he house was buil, size of he fla, and number of household members. Eligibiliy crieria slighly differ from ALG II and so does he wihdrawal rae. A household can receive eiher Wohngeld or ALG II. Guaraneed Mainenance Paymens: When a missing paren canno pay mainenance paymens (for example because of he lack of resources or because he paren canno be found), he governmen akes over wih ransfers beween 110 and 170 euros depending on he region and age of he child. Erziehungsgeld: For children younger han 3 years, here is an addiional child rearing benefi ( Erziehungsgeld ) of 300 euros per monh which can be drawn for a maximum period of 24 monhs. This benefi is means-esed and is only graned if one of he parens is on parenal leave, i.e. no working more han 30 hours per week. The income hresholds up o which his benefi is graned differ by age of he child and hey amoun o abou 30,000 euros in he firs six monhs afer childbirh and are reduced o abou 16,500 euros per year for children aged beween 7 and 24 monhs. Above hese income hresholds, he benefi is wihdrawn a a rae of 62 percen based on household income. Given he assumpions made concerning he age of he children in he families we consider, he Erziehungsgeld is no included in our analysis Poland Income axaion In Poland boh he employer and he employee pay social securiy conribuions. Old age pension insurance is paid a he rae of 9.76%, and disabiliy/survivors pensions a he rae 6.5% by boh he employee and he employer. On op of ha employees pay insurance for sickness and 4 In January 2007, he child rearing benefi was replaced by a new scheme of parenal leave benefis called Elerngeld. This new benefi is no means-esed bu raher relaed o pre-birh earnings of he paren who is on parenal leave. Parens who have no been working prior o he birh of heir child receive a minimum amoun of 300 euros per monh. The means es has been abolished, however he maximum duraion period has been reduced o 14 monhs. maerniy (2.45%) and employers pay work acciden and occupaional diseases insurance (from 0.97% o 3.86% depending on he naure of he job), 5 conribuions o he Labour Fund (2.45%) and conribuions o he Fund of Guaraneed Employees Benefis (0.15%). This gives he oal rae of social securiy conribuions of 40% (of gross earnings, defined as oal labour cos minus he employer s par of SSCs.). Individuals also pay Healh Insurance a he rae of 8.5% of axable income (i.e. income afer SSC conribuions). Of hese, he majoriy (7.75 percenage poins) can be deduced from personal income ax. The income ax sysem in Poland allows for join axaion for couples and single parens. In hese cases only half of he family income is subjec o he ax schedule and he resuling ax liabiliy is hen muliplied by wo. Each employee has a ax allowances for work coss ( revenue coss ). The maximum allowance is 1,227 zloys. The ax schedule has hree brackes wih raes applied o hese a: 19%, 30% and 40% (wih hresholds a 37,024 and 74,048 zloys per year - above he laer figure axes are paid a 40%). Each individual also has a universal ax credi of 530,08 zloys per year. As menioned above a major par of Healh Insurance paymens is also reaed as a ax credi. Transfer sysem In 2005, here were hree major elemens of he Polish means-esed benefis sysem: Zasiłek Rodzinny (Family Benefi, FB), Dodaek Mieszkaniowy (Housing Benefi, HB) and Pomoc Społeczna (Social Assisance, SA) and hey have been described in deail in Bargain e al. (2007). The firs of hose is by far he mos common wih abou 22.6% of all households receiving some form of he FB. The FBs are specific benefis for families wih children and include he basic Family Allowance wih addiional supplemens. These include: a Supplemen for Child Birh, a Supplemen for Lone Parens (SLP) paid o hose lone parens who do no receive any suppor from he absen paren, a Supplemen for Large Families which provides addiional resources o families wih hree or more children, and a Supplemen for he Sar of School Year. The FBs are condiional on previous year s income of he family and are paid if he average monhly income does no exceed 504 zloys per capia. 6 The amouns of he basic Family Allowance in 2005 were: 43 zloys for he firs and he second child in he family, 53 zloys for he hird child and 66 zloys for he fourh and subsequen children. The average amoun of he FA per child was 45.8 zloys, and i was paid o abou 5,2 million children. Ou of he supplemens 5 In he calculaions we assume he average rae of 2.42%. 6 This is a cu-off hreshold, i.e. here is no phasing ou of he benefi, bu i is eiher paid in he full amoun or no a all.

10 10 Mikroekonomia Bank i Kredy syczeń 2008 he SLP was by far he mos commonly received (0,7 million families) and he mos generous wih he average monhly value of abou 176 zloys. 7 The Housing Benefi was graned o approximaely 0,76 million households in 2005, i.e. abou 5.7% of all households and as is name suggess provided assisance relaed o housing expenses. The eligibiliy crieria include income and fla size which canno exceed specified limis condiional on he number of people living in he household. 8 The amouns of he HB relae o he cos of ren and oher household expenses like elecriciy waer and heaing, hough in mos cases auhoriies use impued values for boh ren and expenses. In 2005, he average monhly amoun of he HB was zloys per household among hose who received he HB. Social Assisance benefis play he role of he las resor safey ne, and hey are he leas common of he means-esed benefis in Poland. Permanen Social Assisance (PSA) benefis are paid o hose who are unable o work due o age or disabiliy and who are no eniled o a social insurance disabiliy or reiremen pension. The Temporary Social Assisance (TSA) scheme - which is he benefi modelled in our exercise - is consruced as a op-up benefi, and he TSA is mean o be he las resor safey ne for households in Poland. I is condiional on he family having insufficien resources and meeing cerain social crieria which are, however, sufficienly broad o include mos families in difficul financial siuaions. However, he crieria o be me wih respec o insufficien resources are very sric and limi he number of recipiens of he TSA o only abou 0,3 million families. The amouns of he TSA paid o he poores families in Poland are compued in reference o a legislaed family-specific minimum income bu in mos cases do no represen he difference beween acual income and he compued minimum. The cenral SA legislaion specifies he minimum income levels below which families disposable incomes ough no o fall. This amoun depends on he demographic srucure of he household. In 2005, he monhly value used for he calculaion of he household level minimum was 316 zloys per person, regardless of age, wih he excepion of single adul households in which case he value was 461 zloys for he adul (and 316 zloys for any child). The legislaion implies ha he acual amoun of he TSA paid o families should cover he difference beween he acual income and he specified minimum. This is a relaively common feaure of Social Assisance schemes in many Wesern European counries also in he UK and Germany resuling in mos cases in 100% wihdrawal raes. However, he peculiariy of he Polish sysem is ha he cenral governmen guaranees only a proporion of he difference beween he legislaed minimum and he acual family income. This proporion is 20% for muliperson households or 30% for single person households. The paymen of he remaining 80% or 70% is lef a he discreion of local governmens, which ofen prefer o spend heir resources differenly. The parial coverage of he minimum income, has wo imporan consequences for he budge consrains. Naurally i significanly reduces he amouns of he benefis paid o families in he ou-of-work scenarios. However, because he minimum income wih reference o which he amouns ge compued exceeds he amouns paid, he wihdrawal rae of he TSA is significanly below 100% wih respec o changes in ne income prior o he SA assessmen Family ypes and disposable income simulaions In his secion we presen a brief descripion of he family ypes we have seleced for he comparaive exercise. The analysis covers 8 ypes of families disinguished by demographic characerisics. For each of he broad demographic ypes we run calculaions under differen assumpions concerning individual wages, incomes from he missing spouse (in he case of lone parens) and eligibiliy for housing benefis. This gives us 13 family profiles and for each of hese we compue incomes for hree differen wage levels of he adul whose work incenives we examine. The hree differen wage levels are he 10 h, he 25 h and he 50 h percenile wage aken from he respecive 2005 wage disribuions (separaely for men and women). The deails of he 13 family profiles are presened in Table 1. I provides informaion on he assumed number and ages of children, on wheher we assume ha he lone paren receives any mainenance suppor from he missing paren, and wheher he family is eligible o claim he housing benefi. 11 As we can see here are five family profiles of single aduls (profile 1 wihou children, profiles 2-5 wih children) and eigh family profiles of couples (profiles 6, 10 and 11 wihou children and profiles 8, 9, 12 and 13 wih children). For each of hese profiles we compue incomes a specific work inensiy (defined by hours of work per week) for 7 There are separae elemen of Family Benefis which are no means-esed and are argeed a families wih disabled children. These are he Nursing Allowance and he Parenal Leave Allowance. 8 The income crierion in 2005 was 125% or 175% of he official Minimum Pension, which was zloys per capia for single and muli-person households respecively, and he amouns paid are wihdrawn as income rises a raes which depend on household size and per capia income. According o unpublished governmen saisics only abou 16% of he oal spending on he Temporary SA comes form he local governmens. 10 If he families do no receive any Housing Benefi hen hese wihdrawal TSA raes correspond o he guaraneed raes of TSA paymens. 11 Depending on he specific counry his eligibiliy may depend on wheher he person lives in rened accommodaion, has a high level of asses, or lives in a large aparmen.

11 Bank i Kredy syczeń 2008 Microeconomics 11 one adul earner. In he case of couples, for profiles 6-9 i is assumed ha one of he parners (he wife) does no work and incomes are compued for differen work inensiy of he man, while for profiles we assume ha he man works full-ime and incomes are compued a differen work inensiy of he second earner (he woman). The difference beween profiles 10 and 11 as well as 12 and 13 is he assumed income of he man a full-ime hours. In he case of profiles 10 and 12 we assume ha his hourly wage corresponds o he 25 h percenile of male earnings, while in he case of family profiles 11 and 13 o he 50 h percenile of male earnings. Apar from assumpions concerning individual wages an analysis based on sylised families also requires he choice of oher parameers which influence he level of disposable income hese families will have a specific levels of work inensiy. In paricular, we have o make assumpions concerning he level of housing coss (for he families eligible o receive housing benefis), and he level of mainenance received from he absen paren (in he case of lone parens). In all hese cases similarly o he level of assumed individual wages we choose o focus on families whose incomes and wealh are relaively low and se he levels of hese parameers a he 25 h percenile of respecive counry-specific disribuions. The assumpions we make concerning hese parameers ogeher wih he informaion on he individual wage are provided in Table Comparing financial incenives o work he UK, Germany and Poland The aim of he aricle is o presen he consequences he ax and benefi sysems in he hree counries have on disposable incomes of he seleced families. We do his by means of compuing disposable incomes a differen inensiy of work, which is represened by differen numbers of hours worked per week. This gives us family-specific budge lines and allows us o calculae replacemen raios a differen work inensiy. In each case he budge consrains are drafed for he hours range of 0 45 for one earner. In cases of couples we firs draw he budge lines for he differen number of hours worked by he man, i.e. assuming ha he woman does no work (family profiles 6 9), and hen for he woman, assuming ha he man works full-ime (family profiles 10 13). A each hour poin he budge lines show he disposable income of he family a his specific work inensiy. Budge consrains for he 13 family profiles are presened in Figures 1 o 13. In he case of each Figure we show he resuls for he UK (panels A and B), Germany (panels C and D) and Poland (panels E and F). For every counry he firs panel (panels A, C, E) shows he differen componens of he budge consrain drafed under he assumpion of he 25 h percenile of he male (family profiles 6 9) or female (profiles 1 5 and 10 13) counry specific wage disribuion. The second panel (panels B, D, F) shows only he oal disposable incomes bu under hree differen assumpions concerning he individual wage (i.e. he 10 h, 25 h and 50 h percenile of he disribuion). Deailed descripion of Figures 1 o 13 is given in Secion 5. A useful way of summarising he effec of he ax and benefi sysem on he incenives o work is an analysis of replacemen raios (RRs), which are raios of disposable income in he ou-of-work scenario o he disposable income in he in- work scenario. 12 This is done below in 12 See for example Nickell (2001). Table 1. Family profiles considered in he exercise Family profile Descripion Age of children Mainenance Housing Benefi Percenile wage, female Percenile wage, male 1 Single female no children n.a. n.a. Yes 10, 25, 50 2 Single female, one child 5 No Yes 10, 25, 50 3 Single female, one child 5 Yes Yes 10, 25, 50 4 Single female, one child 5 Yes No 10, 25, 50 5 Single female, wo children 5 and 8 Yes Yes 10, 25, 50 6 Couple, male earner, no children n.a. n.a. Yes 10, 25, 50 7 Couple, male earner, one child 5 n.a. Yes 10, 25, 50 8 Couple, male earner, one child 5 n.a. No 10, 25, 50 9 Couple, male earner, wo children 5 and 8 n.a. Yes 10, 25, Couple, wo earners, no children n.a. n.a. Yes 10, 25, Couple, wo earners, no children n.a. n.a. Yes 10, 25, Couple, wo earners, wo children 5 and 8 n.a. Yes 10, 25, Couple, wo earners, wo children 5 and 8 n.a. Yes 10, 25, Noe: In case of wo-earner couples we assume fixed full-ime employmen of he man and vary he hours of work of he woman. Source: Auhors compilaion.

12 12 Mikroekonomia Bank i Kredy syczeń 2008 Table 2. Counry specific inpu parameers used for micro-simulaion UK (pound) Germany (euro) Poland (zloy) Wages hourly hourly monhly Female: 10 percenile percenile percenile Male: 10 percenile percenile percenile Housing coss Ren: monhly monhly monhly 25 percenile for single adul rening HH *32m2 25 percenile for muliple adul rening HH *42m2 Bills: 25 percenile for single adul rening HH percenile for muliple adul rening HH RR = Y Y RR = Y Y = = Mainenance from absen paren ( 0) / sj j( h= 0) / j( h ) sj j h= j( h ) (privae ransfer o lone parens): monhly RR sj = Y j( h= 0) monhly / Y j( h= ) monhly 25 percenile Y j( h=0) Y 312 Y 230 j( h=0) Y j( h = ) j( h = ) Noe: Perceniles for wages, mainenance and housing coss come from: Family Resources Survey 2003/04 Y j(indexed ( h=0) o Y 2005) j( h = ) for he UK, German Socio-Economic Panel (GSOEP) 2005 for Germany, and Household Budges Survey (BBGD) 2005 for Poland. RR c1 j = Y j( hm= 0, hw= 0) / Y j( hm=, hw= 0) RR c1 j = Y j( hm 0, hw= 0) / Y Source: Auhors calculaions. RR j( hm=, hw= 0) c1 j = Y j( hm= 0, hw= 0) / Y j( hm=, hw= 0) Secion 6 for each of he 13 family profiles, in each case using he hree chosen hourly wages. The advanage of presening he resuls in he form of replacemen raios on op of deailed analysis of he shape of he budge consrain lies primarily in he relaive naure of hese measures. This means ha on he one hand, we can make direc and sraighforward comparisons of araciveness o work wihin counries for differen ypes of families. On he oher hand, from he poin of view of he inernaional comparison, RRs allow easier comparaive analysis since he relaive measures are independen of exchange raes and purchasing power assumpions. RRs for single individuals are compued as: Similarly for couples in family profiles j( hm= 0, hw= RRs 0) Y j ( hm=, hw= 0 Y j( hm= 0, hw Y = 0) Y j( hm= 0, hw= 0) j ( hm= Y, hw j ( = hm0 ) =, hw= 0) are compued as: RR c2 j = Y j( hm= 40, hw= 0) / Y j( hm= 40, hw= RR c2 j = RR Y j( chm 2 j = = 40, Yhw j( = hm 0) = / 40, Yhw j( = hm 0) = / 40, Yhw j( hm = = ) 40, hw= ) (3) Ywhere j Y ( hm= 40, hw j ( hm= = 0) 40, hw= 0) is income when he man works full-ime and he woman does no work and Y j( hm= 40, hw= ) is in-work income when he man works full-ime and he Y Y j( hm= 40, hw= ) j( hm= 40, hw= ) Y ) Y j ( hm= 40, hw= 0) woman works hours per week (again compued under wo in-work scenarios of par-ime (20 hours) and fullime (40 hours) work). Compued replacemen raios are given in Table 3 for par-ime work and Table 4 for full-ime work, and deailed discussion of replacemen raios is presened in Secion ) RR RR = Y Y sj = Y Y = = sj ( 0) / j( h= 0) j h/ = j( h j )( h ) Y Y j( h=0) Y j( h=0) Y j( h = j) ( h = ) RR (1) sj = Y j( h= 0) / Y j( h= where is ou-of work income Y j( hand =0) Y j( h = ) is in-work income of a single adul family j. The resuls presened RR here are compued under wo in-work scenarios RR = of RR Y par-ime = YY (20 Y hours) and full-ime (40 = = hours) work. For couples in family profiles 6-9 RRs are compued as: RR c1 j = Y j( hm= 0, hw= 0) / Y c1 j = Y j( hm= 0, hw= 0) / Y j( hmj= ( hm, hw= RR =, 0) hw= c1 0) j = Y j( hm= 0, hw= 0) / Y j( hm=, hw= 0) sj j( sj h= 0) / j( hj ( = h0) / ) j( h ) RR sj = Y j( h= Y 0) / Y j( h= ) j( hm= 0, hw= 0) Y j( hm= 0, hw= 0) Y j ( hmj = ( hmy, hw= = j, hw 0( hm= ) = 0) 0, hw= 0) Y j ( hm=, hw= 0) Y Y j( h j( h=0) Y =0) Y j( h = ) j( h = ) Y j( h=0) Y j( h = ) RR RR RR c1 jrr = cy c1 j = Y 2 = Y j( hm= 0, j( hm= 40, hw= 0) / c2 j = j( Yhm j( = hm 0, hw = 40, = 0) / hw Y= 0) / Y j( hm=, hw= 0) hw= 0) j/ ( hm Y j= ( hm, hwj ( = 40, hm 0) RR = hw40, = c hw ) 2 = j ) = Y (2) j( hm= 40, hw= 0) / Y j( hm= 40, hw= ) RR c1 j = Y j( hm= 0, hw= 0) / Y j( hm=, hw= 0) where Y j( hm= 0, hw= 0) Y Y j ( hm= j ( hm= j ( hm= 40, hw 40, = hw 0) = 0) Y, hw= 0) Y j( hm= 0, hw= 0) Y j ( hm=, hw= 0) j ( hm= 40, hw= 0) Y j( hm= 0, hw= 0) Y j ( hm=, hw= 0) Y Y j( RR hmj ( = chm 240, j hw = 40, Y= hw j) ( hm = = ) 40, hw= 0) / Y j( hm= 40, Y hwj ( = hm ) = 40, hw= ) is income when boh parners are ou of work and is income in work when he man works hours and he woman does no work. The RR resuls = Yare again compued Y under RR = Y Y = wo in-work = scenarios for he man, of par-ime (20 hours) and fullime (40 hours) work. c2 j j( hm= 40, hw= 0) / j( hm= 40, hw ) c2 j j( hm= 40, hw= 0) / j( hm= 40, hw ) Y j ( hm= 40, hw= 0) Y j Y ( hm= 40, j ( hm= hw= 40, 0) hw= 0) Y j( hm= 40, hw= ) Y Y j( hm= 40, j( hm hw = 40, ) hw= ) ) 5. Resuls budge consrains In his secion we provide a deailed descripion of he budge consrains generaed for he hireen family profiles for each of he counries presened in Figures 1 o 13. A general overview of he resuls is given in Secion 5.1. Then, in Secion 5.2 we focus more specifically on he ype of suppor exended o families wih children. In panels A, C and E of he hireen figures we presen he differen elemens of disposable incomes. Where possible we have ried o mark similar componens of income wih he same colours o make he comparisons easier. Thus, ne earnings are represened by he black 13 Deails of he absolue levels of disposable incomes used for he calculaions of replacemen raios are available from he auhors upon reques.

13 Bank i Kredy syczeń 2008 Microeconomics 13 bars, mainenance paymens from he absen parner are marked in ligh grey, basic child or family benefis are marked in dark green, housing relaed benefis are marked in blue, and social assisance is represened as whie bars. The legend o each of he figures presens he deails including he various counry-specific componens of he disposable income. An imporan poin needs o be clarified concerning he resuls for Poland which relaes o he way we model Temporary Social Assisance (TSA). As menioned in Secion 2.3 only a proporion of he TSA is guaraneed by he cenral budge and he res of he paymen a family is eligible for according o he Social Assisance legislaion (which is 70% for single-person households and 80% for larger households) remains a he discreion of local auhoriies. More ofen han no hese paymens are no received by families. To accoun for his in he budge consrains drafed for Poland we separae ou he cenral (whie bars) and he municipal (dark grey bars) pars of he TSA in panels E of Figures 1 o 13. In panels F of he figures we presen he budge lines which resul from including only ha par of he TSA which he families can be sure o receive, i.e. he cenrally guaraneed elemen. This way of presening he resuls, on he one hand, allows o see he degree of generosiy of he TSA legislaion, and on he oher, shows he acual, guaraneed financial incenives ha he families face in he labour marke. I also makes he resuls more consisen from he comparaive poin of view. Anoher poin o noe in he case of he figures drawn for he UK are he Council Tax (CT) paymens, which are represened in panels A by he red bars. The CT values are hen subraced from he oal family incomes for he purpose of drawing he budge lines in panels B Budge consrains overview There are several imporan general conclusions o be drawn from he analysis of he budge consrains presened in Figures 1 o 13. The graphs show he varying degree of generosiy of each of he hree ax and benefi sysems and he operaion of he differen elemens In-work suppor An imporan elemen which differeniaes he UK from he oher wo counries is he in-work suppor sysem, which in panels A is represened by he brown bars. The difference in he generosiy of he Working Tax Credi beween hose wih and hose wihou children is also quie clear, for example when we compare panels A in Figure 1 wih hose in Figures 2 o 5. Wha is also raher sriking is he relaive high level of suppor for families wih children in he UK hrough he combinaion of he Child Benefi and he Child Tax Credi. I is ineresing o noe ha he CTC exends relaively high up he income disribuion. The families are eligible o receive relaively high amouns of he CTC even in scenarios when one parner is working full-ime and he oher par ime, and he family-premium par of he CTC is also received by he family in which boh parners work full-ime (see panel A of Figure 13). 14 Wha is also an imporan feaure of he Briish sysem is he fac ha eligibiliy for social assisance (in he form of Income Suppor) ends a relaively low levels of income. This is he case boh for singles and for couples, and is parly relaed o he maximum working hours limi (15) bu parly also o he relaively high levels of paymens hrough he CTC Social Assisance and Housing Benefi Eligibiliy for social assisance seems o end a low levels of income also in Poland, bu his is he case only for single-adul families. Couples in Poland, and especially hose wih children, are eligible o receive he TSA even a relaively high levels of wage income. This can be seen on panel E of Figures 7, 8 and 9. In Figure 7E we can see ha he family is eligible for Social Assisance even when he man in he couple works full-ime (a 25 h percenile earnings). In Germany eligibiliy for social assisance (ALGII) exends relaively high up he earning scale for boh singles and couples, bu par of he explanaion for ha is he fac ha he ALGII also includes he housing benefi. Thus, for example, if we compare he budge consrains of wo families - one which is eligible o receive he Housing Benefi and he oher which is no (see Figures 7D and 8D) we can see ha he ALGII ends relaively early - a abou half-ime earnings of he man in he couple. In Poland he meanses for he TSA also includes he Housing Benefi, and so when he family is no eligible for he HB he eligibiliy for he TSA exends furher (compare Figures 7E and 8E). Such high level of TSA eligibiliy for couples in Poland clearly sands ou in our analysis. The eligibiliy rules concerning he Housing Benefi in Poland are also relaed o he earlier poin. Neiher in he UK, nor in Germany he eligibiliy o he benefis relaed o housing expenses exends as high up he relaive earnings disribuion as in Poland. As we can see on he figures, he Polish HB rules imply ha a single woman working full-ime a 25 h percenile female earnings would sill be eligible o claim he HB regardless of wheher she does or does no have children. The same applies o all one-earner couples in which he man works a he 25 h percenile male wage. On Figures 10, 12 and 13 we can see ha he eligibiliy does no end even if he second parner begins o work par-ime. If he earnings of he man are low (Figure 12) and we consider a couple wih wo children, he 14 A 50h perceniles earnings of he man and a 25h percenile earnings of he woman.

14 14 Mikroekonomia Bank i Kredy syczeń 2008 eligibiliy o he HB does no end even in he siuaion when boh parners work full-ime Means-esed benefis and Effecive Marginal Tax Raes The budge consrains presened in his paper also allow o idenify elemens of he ax and benefi sysems which may need paricular aenion of policy makers wih respec o he labour marke incenives he sysems provide. This refers paricularly o he feaures of he sysems which lead o effecive marginal ax raes (EMTRs) in excess of 100%. In he figures hese can be idenified as poins on he budge lines where he level of he disposable income falls despie he fac ha work inensiy (and hus gross earnings) increase. Geing rid of EMRTs in excess of 100% was one of he aims of he ax and benefi reforms in he UK inroduced since he early 1990s, and all recen changes o axes and benefis have been conduced in such a way so as o avoid hese effecs. As we can see on panels A and B of Figures 1 o 13, increases in gross earnings never lead o reducions in disposable incomes. There are pars of he budge lines which are fla implying EMTRs of 100%, bu here are no poins on he budge lines suggesing raes in excess of hese. This is no he case when we look a he budge lines generaed by he German and he Polish sysem. EMTRs in excess of 100% Germany The German sysem inroduces EMTRs in excess of 100% as a resul of he so called Mini-jobs. As oulined in Secion 2.2, employees pay no Social Securiy Conribuions on earnings of less han 400 euros per monh. However, once he level of earnings exceeds his limi, SSCs have o be paid no only on he earnings over and above he 400 euros, bu also on he iniial 400. This implies ha exceeding his level of gross earnings resuls in a reducion of disposable income. As we can see on Figures he combinaion of he ax and he SSCs sysems implies ha his applies especially o he work of second earners in couples. Depending on he level of earnings of he woman he 400 euros hreshold is reached a differen levels of work inensiy, bu he negaive work incenives can be seen in he case of budge lines drawn for all second earners. EMTRs in Germany resul also from he combinaion of ax and SSC paymens wih he wihdrawal of he Child Supplemen his can be seen in Figures 7, 8, and 9 on panels C and D. EMTRs in excess of 100% - Poland In Poland he EMTRs exceeding 100% are relaed o wo elemens of he benefi sysem, namely he Housing Benefis and he Family Benefis. In he case of he Housing Benefis while he level of he paymens is gradually wihdrawn as ne incomes rise, he benefi is wihdrawn enirely a he poin when he income considered for he means-es exceeds a cerain hreshold value. The effec of such wihdrawal can be seen in Figures 1, 2, 3, 4 and 6 on panels F for he case of he disposable income compued a 50 h percenile wage. The same effecs are also presen in Figure 10 a all hree wage levels of he second parner. The effecs of wihdrawing he Single-Paren Supplemen of Family Benefis can be seen in Figure 2 (panels E and F). In Figure 2E we can see ha he family exceeds he hreshold for he higher level of he supplemen when he woman begins o work more han 14 hours per week. This effec happens a lower work inensiy for he 50 h percenile wage and a higher work inensiy for he 10 h percenile wage (Figure 2F), bu in all cases working an exra hour leads o a lower level of he benefi. On he figures we can also idenify hree profiles of families for which a a cerain level of earnings he Family Benefis are fully wihdrawn. This can be seen in Figures 2 and 3 (panels F) for he case of he disposable income wih 50 h percenile wage. For his level of he wage Family Benefis are wihdrawn a work inensiy of abou 35 hours per week. The resul of his is a reducion in disposable income in response o higher level of earnings. Since he eligibiliy hreshold for he FB is compued per capia (including he aduls in he family), couples wih children are eligible for he benefis even a relaively high level of earnings. Of all he budge consrains drafed for couples he wihdrawal of Family Benefis can be noiced only in he case of he family profile 13, where boh parners work a 50 h percenile wage and he man works full-ime (Figure 13F). A he poin when he woman s work inensiy increases o abou 35 hours per week, he family is no longer eligible o receive he Family Benefis. The negaive effecs on work incenives which are he consequence of he exisence of very high EMTRs will also be refleced in he replacemen raios, he analysis of which is presened below in Secion Work inensiy and income gains The budge lines presened in panels B, D and F also provide a good inuiive reflecion of how srong are he labour marke incenives generaed by he respecive ax and benefi sysems. This is given by he slope of he budge lines a various levels of work inensiy, which shows how fas disposable incomes grow in response o increases in hours of work and hus gross earnings. The assumpions made for Poland concerning he paymens of Temporary Social Assisance imply low levels of suppor hrough he TSA bu also relaively low wihdrawal raes of he benefi and his in urn means ha disposable incomes generally grow as earnings rise even a he lowes levels of earnings. In Germany and in he UK, on he oher hand wihdrawal raes of social assisance benefis (ALGII and Income Suppor) a low levels of earnings imply very low increases in disposable

15 Bank i Kredy syczeń 2008 Microeconomics 15 incomes or in some cases no increases a all (i.e. 100% EMTRs). This is very clearly demonsraed, for example in Figures 1 and 7. I is also imporan o noe ha in he UK in he cases of several families, earnings grow a lower raes compared o Germany or Poland even beyond he poins where social assisance and housing benefis have been wihdrawn. This resul relaes o he wihdrawal of he WTC. On he one hand, he paymens of he WTC encourage aking up employmen. 15 On he oher hand hough, because of he exension of he earnings range over which some benefis are wihdrawn, he WTC reduces incenives o increase work inensiy or in fac o increase produciviy a he same work inensiy. The effec of he WTC as far as he conribuion of earnings o he level of disposable income is concerned can be seen very clearly when comparing Figures 1B and 2B, which are drafed for he same levels of gross earnings. We can see ha in he case where he woman receives no WTC (he line of he disposable income wih 50 h percenile wage in Figure 1B) disposable incomes grow faser compared o he rae of increase of earnings for he woman wih he same level of earnings bu who is eligible o receive he WTC (Figure 2B). Ineresing differences beween he hree ax and benefi sysems in erms of he rae of increase in he disposable income in response o growing gross earnings can also be seen for example in Figures 3, 4, 6 and Budge consrains - suppor for families wih children For several imporan reasons he financial incenives on he labour marke for families wih children deserve some special aenion. One of hese is he fac ha he rade-off beween efficiency and equiy in he case of families wih children is especially difficul. On he one hand, child povery is an imporan policy concern and povery among children may have significan long-erm social and economic implicaions. On he oher hand, since families wih children represen a large proporion of he populaion, mainaining overall high employmen levels would be impossible wihou encouraging parens o ake up work. Parens employmen, apar from economic implicaions for he households, may also have posiive effecs on child developmen and he child s oucomes such as school achievemens and healh. However, providing sufficien resources in ou-of-work scenarios, combined wih higher coss of working for families wih children (among oher hings in he form of childcare) implies ha providing srong financial incenives o work is far from sraighforward. Tax and benefi reamen of families wih children is herefore a very imporan issue on he agenda of mos governmens. 15 This is refleced in he kinks in he budge lines a 16 and 30 hours of work per week, which are he eligibiliy poins for he WTC and for he full-ime premium. The Briish governmen has for a long ime made reducion of child povery one of he op prioriies. The reducion was o be achieved by increasing he generosiy of governmen ransfers for families wih children and, a he same ime, increasing he araciveness of employmen o parens by making work pay more. The firs ool hrough which his was supposed o be achieved was he Working Families Tax Credi (WFTC), inroduced in Ocober 1999 a reform which increased he relaive generosiy of in-work ransfers. This mechanism was subsequenly replaced by he Children s Tax Credi and he Working Tax Credi in March The firs of hose combined several childrelaed elemens of he ax and benefi sysem, while he oher was o preserve he greaer financial araciveness of work which was presen in he WFTC. 16 While he WFTC reform improved financial incenives o work, he overall package of reforms inroduced by he Briish governmen since 1997 has had mixed effecs on he araciveness of employmen. 17 The recen reforms and proposals of reforms of he ax and benefi sysems in Germany and Poland also signal ha he issues of financial araciveness of employmen for parens is an imporan concern. In Germany he focus of aenion has been he issue of parenal leave afer childbirh and he problem of appropriae provision and affordable cos of childcare. In Poland on he oher hand, he recen discussions focused on he provision of ax allowances for families wih children hereby making work pay more for parens. These recen governmen proposals as well as he srucure of he 2005 sysems presened in our analysis show differen approaches o supporing families wih children, and he differen soluions adoped offer poenial crosscounry lessons. Below we use he example families o discuss he operaion of he benefi design wih special aenion o families wih children Suppor for lone-paren families Figures 2-5 show some imporan differences in he reamen of lone parens in he ax and benefi sysems in he hree counries. One of he more sriking poins of he analysis of our examples is he fac ha financial incenives o work are no much sronger for he lone parens who receive mainenance suppor from he missing parners (compare FP2 and FP3). This is somehing we could expec since his suppor couns as income for he compuaion of means-esed benefis, and so ou-of-work income should no be much differen, while in-work income should be higher for he parens receiving mainenance. This, however is couneraced in 16 For more deails on he Briish reforms see for example Clark e al. (2002); Blundell (2000), and Brewer (2003). 17 See for example Brewer e al. (2006), Blundell e al. (2005) or Myck, Reed (2006).

16 16 Mikroekonomia Bank i Kredy syczeń 2008 Germany and Poland by addiional paymens in he form of sae-financed mainenance paymens or a special supplemen in Family Benefis, respecively. In-work incomes are higher in he UK for he families which do receive mainenance, and so hese families have sronger incenives o work han lone parens who do no receive suppor from he absen paren. Wha is also noeworhy when looking a he budge consrain chars is he very big difference in disposable incomes of lone parens who are no eligible for Housing Benefi compared o hose who do receive he HB (Figures 2 and 3). I is also ineresing o poin ou ha unlike in he UK and Germany where Social Assisance is reaed separaely from he Housing Benefi (in he sense ha he Housing Benefi is no reaed as income for he Social Assisance means-es), in Poland he family profiles 2 and 3 in heory, i.e. according o he legislaed minimum income - are eligible for he same level of suppor a zero hours of work. Moreover, he effec of he Working Tax Credi in he UK is mos pronounced (see Figures 3A and 4A) especially in he case of lone parens who canno claim he HB. This effec will also be quie clear in he more deailed analysis of replacemen raios below. Given he low level of ou of work means-esed suppor in Poland (we assume ha he families receive only he cenrally guaraneed proporion of Temporary Social Assisance) i is no surprising ha in mos cases financial incenives o work as refleced in he RRs are sronges in Poland. This is he case especially for single aduls wihou children (family profile, FP1) and firs earners in couples wihou children (FP6). For hese family profiles financial incenives o ake up employmen are significanly sronger in Poland, compared o he UK and Germany. Financial incenives o par-ime work in Poland are similar in magniude o hose relaed o full-ime employmen in he oher wo counries. As far as he comparison beween he UK and Germany is concerned i is worh noing ha while incenives o par-ime work in he UK are very low (due o he very high benefis wihdrawal raes a low incomes), his is no longer he case for full-ime work, which a all wage levels is financially more aracive in he UK compared o Germany. This is he case boh for singles and couples wihou children Financial incenives for lone-parens Suppor for couples wih children As we can see in Figures 7, 8, 9, 12 and 13 he generosiy of he basic suppor for families wih children in couples is much higher in Germany compared o he UK and Poland. 18 An imporan difference which canno be seen on he picures presened here is he fac ha he Polish family suppor is means-esed, while boh in he UK and Germany i is universal, i.e. independen of he level of family income. While in he UK he Child Benefi is supplemened by paymens hrough he Children s Tax Credi and he Working Tax Credi (which is more generous for hose wih children), in Poland he families received no furher child-relaed suppor from he sae in Resuls replacemen raios In his secion we discuss he resuls presened in Tables 3 and 4 which show replacemen raios compued for he 13 family profiles for each of he hree assumed wage raes using he formulae discussed in Secion 4. From he poin of view of he labour marke i is especially imporan how financial incenives here expressed in he form of RRs differ by family profile for he same level of relaive earnings and how hey differ for a given family profile for differen levels of earnings, i.e. how srong is he progression of he disposable income as earnings rise. 18 By he basic suppor we mean he Child Benefi in he UK, he Kindergeld in Germany, and Zasiłek Rodzinny in Poland. For lone parens he comparison beween he UK and Germany proves o go very srongly in favour of he UK, where financial incenives o work for family profiles 2, 3, 4 and 5, all excep one imply higher araciveness of employmen a all hree wage levels. Financial incenives are especially srong in he UK in he case of a lone paren wih one child who is no eligible o receive he Housing Benefi (FP4). In his case in fac, financial incenives o par-ime work a he wo lower wage raes are even sronger in he UK han in Poland. This is he effec of he addiional benefis which lone parens in he UK receive in he form of in-work suppor. The high level of his suppor a par-ime work can also be noiced in Figure 4. I is ineresing o noe, hough, ha once he WTC is wihdrawn (a higher levels of earnings) he difference in financial araciveness of work diminishes and in fac he full-ime RR (Table 4) for he 50 h percenile wage is lower in Germany han in he UK (0.354 relaive o 0.363). Owing o he Working Tax Credi employmen is also significanly more aracive in he UK compared o Germany for family profile 5. For his family profile he effec of he in-work suppor is such ha he RRs compued for he UK are very close o hose calculaed in he case of he respecive family under he Polish sysem Financial incenives for firs and second earners in couples In he case of firs earners in couples (i.e. family profiles 6-9) he paern is relaively similar, wih relaively srong effecs of in-work suppor in he UK, especially for families wih children in he cases of low assumed

17 Bank i Kredy syczeń 2008 Microeconomics 17 Table 3. Replacemen raios a par-ime work (20 hours per week) UK Germany Poland PT-10pc PT-25pc PT-50pc PT-10pc PT-25pc PT-50pc PT-10pc PT-25pc PT-50pc Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Noe: PT-10pc - par ime replacemen raio for he 10 h percenile wage. Source: Auhors calculaions. Table 4. Replacemen raios a full-ime work (40 hours per week) UK Germany Poland FT-10pc FT-25pc FT-50pc FT-10pc FT-25pc FT-50pc FT-10pc FT-25pc FT-50pc Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Family profile Noe: FT-10pc - full ime replacemen raio for he 10 h percenile wage. Source: Auhors calculaions. earnings. I is worh noing, hough, how imporan for employmen incenives for he firs earner in he case of Germany is he family ax-spliing sysem. For he firs earner in he couple in family profiles FP7, FP8 and FP9 a relaively high earnings (50 h percenile) financial incenives o work are sronger in Germany han in he UK. The incenives are very close also a he 25 h perceniles wage. Join axaion, which in a progressive ax sysem gives preferenial ax reamen o firs earners in couples, is one of he mos likely explanaions of his fac. In he case of a single-earner couple he benefi of his reamen is higher, he higher is he level of earnings. For second earners in couples (FP10-FP13) he RRs for he family profiles we focus on are in general no longer affeced by Social Assisance sysems. They are herefore much more similar for all hree counries. For second earners in couples wihou children financial incenives o work for second earners are sronges in he UK. This may be o some exen relaed o he overall level of axaion, bu one of he deermining facors here may be he join axaion sysem operaing in Poland and Germany. This is because ax spliing generally implies relaively higher ax burden on he second earner. The RRs for second earners are especially high in Germany in he case of FP11 (boh par and full-ime) a couple wihou children where he firs earner works full-ime a 50 h percenile wages. For he Polish sysem he difference beween RRs for couples wihou children (FP10 and FP11) is very small his relaes o he fac

18 18 Mikroekonomia Bank i Kredy syczeń 2008 ha a his level of earnings boh parners are axed a he same ax rae. The only advanage of join axaion for he firs earner is herefore he universal ax credi. In Poland he differences are slighly higher for he family profiles wih children (FP12 and FP13) which in he scenario when he second earner does no work are eligible for he Housing Benefi. Moreover, when boh parners earn he 50 h percenile wage and work fullime hen hey are no longer eligible o receive Family Benefis. This leads o a much higher replacemen raio for he second earner a full-ime 50 h percenile earnings for FP13 compared o FP12 (0.661 compared o 0.603) Drawbacks of in-work suppor We have discussed above he posiive effecs of in-work suppor on financial incenives o work for lone parens and firs earners in couples in he Briish sysem. A comparison of he RRs, however, is also insrucive in demonsraing he negaive consequences of in-work suppor on he labour marke, namely lower reurn o he growh of gross earnings, and lower work incenives for second earners. As we menioned above one of he implicaions of in-work suppor is he fac ha he reurn o work as gross earnings rise is lower han in he absence of such suppor. In-work suppor is means-esed and hus wihdrawn as income rises. Because of his wihdrawal he difference in disposable income in response o growing gross earnings (as a resul of higher wages or more hours of work) for he recipiens of in-work suppor is lower han for hose who do no receive i. This can be demonsraed using family profiles 3 and 7, by looking a how full-ime RRs change as we consider differen levels of gross earnings (Table 4). Focusing on FP3 as earnings rise from 10 h o 25 h o 50 h percenile in he UK he full-ime RRs change from o o 0.500, a change respecively by 2.3, and 4.7 percenage poins. In Germany he RRs change from 0.780, o 0.702, o 0.569, i.e. by 7.8 and 13.3 percenage poins. The difference in he RRs for FP7 in he case of he UK is 6.5 and 11.7, while in Germany i is 10.9 and These effecs are consequences of he generous in-work suppor. 19 The negaive effec of in-work suppor on he financial incenives of second earners can be seen in he comparison of incenives in he UK for couples wih and wihou children (i.e. by comparing FP10 wih FP12 and FP11 wih FP13 for boh par-ime and full-ime work of he second earner). While he differences in Germany are relaively low, hose in he UK are much higher. For example a full-ime 25 h percenile earnings he difference in RRs beween FP12 and FP10 in Germany is 3.6 percenage poins, and in he UK i is 18.6 percenage poins. The reason for such differences beween he wo counries is he fac ha in he UK families wih children (i.e. FP12 and FP13) are eligible for relaively high values of in-work suppor in he case where he second earner does no work. This makes employmen of he second earner much less financially aracive, since as he second earner eners employmen and family earnings rise as a resul he WTC is wihdrawn. Such negaive effecs on financial araciveness of work resuling from he Briish syle in work suppor have ofen been discussed in he labour marke lieraure. 20 In a recen paper Haan and Myck (2007a) showed ha while inroducing a Briish-syle in-work suppor in Germany would have srong posiive effecs on employmen of single people and of firs earners in couples, i would have very high negaive effecs on employmen of second earners. 7. Conclusion In his paper we have presened a comprehensive comparison of work incenives beween he UK, Germany and Poland using a se of sylised families. Labour marke incenives resuling from he combinaion of gross wages and he rules of respecive ax and benefi sysems have been analysed by looking a he deailed componens of disposable incomes and he shapes of he budge consrains as well as by comparing replacemen raios compued a par and full-ime hours of work. For each of he 13 family profiles analysed in his paper we have compued disposable incomes a differen work inensiy levels, aking heir gross wages o correspond o he 10 h, 25 h and 50 h percenile of he gross wage disribuion. The analysis provided in his paper gives a summary of labour marke incenives generaed by he hree ax and benefi sysems and could consiue a background for considering poenial improvemens o he design of axes and benefis in eiher of he counries from he poin of view of incenives o ake-up employmen. A he same ime, however, i provides a simplified picure of he incenives acually faced by individuals. This applies especially srongly o he Polish case for wo reasons. The firs of hese is a resul of he eligibiliy crieria for Social Assisance benefis. In our analysis for all counries we have assumed ha condiional on passing he income means-es he sylised families we examined were eligible for Social Assisance. In realiy, his will no always be he case, since in all hree counries he families have o pass an addiional wealh es. While in he UK and Germany his relaes o he level of asses, in Poland i is conduced wihou specific 19 Though here par of he difference may also be due o he join axaion of couples in Germany. 20 See for example he classical paper by van Soes (1995), or Blundell e al. (2000) and Myck, Reed (2006) on he Briish reforms.

19 Bank i Kredy syczeń 2008 Microeconomics 19 reference o asses in he form of an informal assessmen by a represenaive of he local Social Assisance Cenre, and according o a recen analysis implies a very resricive approach o he wealh-relaed eligibiliy crieria. 21 As Haan and Myck (2007b) demonsraed using replacemen raios compued for represenaive samples of he German and Polish populaions (respecively using he GSOEP-2005 and BBGD-2005 daa) he resriciveness of he wealh crieria in Poland implies very low RRs for a much larger number of families compared o Germany, and hus suggess very srong work incenives in he Polish sysem. The second aspec which could no be addressed in his paper, and which is also imporan for Poland is wihin-household sharing of resources among several families. While muli-family households are raher rare in Germany and in he UK, in Poland abou 27% of households include more han one family (defined as a single adul or a couple wih or wihou dependen children). The likely sharing of resources wihin households implies ha alhough we may calculae very low incomes in ou-of work scenarios (assuming a single-family household) he family may in fac be able o fall back on some income of oher families i shares he household wih. In consequence, he replacemen raio for such a family would be higher, paricularly in he case when income earned in he in-work scenario were also o be shared wih oher families in he household. Anoher hing ha canno be accouned for in such a simple analysis is he fac ha he differen sysems have varying adminisraive procedures. This applies, for example, o he income considered for specific benefis, and he period for which he benefis are graned. All his will also have an effec on labour marke incenives, hrough he dynamic aspec of he sysem and he uncerainy he sysems inroduce as far as eligibiliy is concerned. And ye, despie hese argumens which call for some cauion concerning he inerpreaion of our 21 According o Myck (2007) only abou 5% of all households would pass he wealh-es crierion in resuls, here are several imporan conclusions which follow from our analysis. In he paragraphs below we focus on he mos imporan implicaions for Poland. The firs of hose is he relaively liberal eligibiliy rules concerning he Housing Benefi in Poland, which imply ha families a relaively high levels of incomes may fulfil he crieria o receive his suppor. The paymens of HB seem o exend far beyond he relaive income levels when we compare hem wih Germany or he UK (see e.g. Figures 7 or 12). Secondly, he levels of he legislaed minimum incomes especially for couples seem o be relaively high, even in comparison wih Germany. Even if i is rue ha families in mos cases do no receive he full legislaed amoun, i is sill a fac ha officially hey may claim some Social Assisance even a relaively high levels of employmen income (see Figure 8). An imporan difference beween Poland and boh he UK and Germany is ha he receip of Housing Benefi limis he eligibiliy for Social Assisance. This means ha hose wih high housing cos in Poland would have lower afer-housing-coss disposable incomes (i.e. incomes afer he paymen of housing coss) even if hey receive he Housing Benefi o cover hese coss (compare Figures 7E and 8E). Two oher imporan poins o sress are: (i) he lack of universal child-relaed suppor in Poland, and he low (also in relaive erms) levels of he basic meansesed child-relaed benefis (Zasiłek Rodzinny), and (ii) he low incenives o work for second earners which resul parly form he join sysem of axaion which sill operaes in Germany and Poland. Finally, he in-work suppor reforms in he UK show ha such an insrumen as he Working Tax Credi can prove effecive in encouraging employmen while a he same ime reducing povery. Alhough such insrumens ough o be implemened wih cauion (see Haan, Myck 2007a) hey can be designed in such a way as o improve financial araciveness of work.

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