Tax Reform, Labour Supply and Earnings Growth

Even before the financial crisis of 2008–2009 many developed economies were struggling to maintain employment and earnings. These problems become even more severe as populations age. The key to extending employment and earnings is to focus policy on improving the flows into work for people leaving school and for mothers with young children, and on expanding work among people in their 50s and 60s. These are the margins where labour supply is most sensitive to tax incentives, and a policy redesign can enhance earnings throughout the working life. Human capital policy has a complementary role in improving the payoff to work and ensuring that earnings hold up longer over a lifetime. The evidence points to a blueprint for a coherent and effective policy that takes a life-cycle view of work and human capital accumulation. At a broad level, key proposals would follow those in the Mirrlees Review [IFS, 2011]: to simplify and integrate the benefits and welfare systems, target work incentives where they are most effective, and align tax rates across similar sources of income to reduce avoidance opportunities and broaden the tax base.