Page 27 - IDEA Study 3 2018 Low skilled

5. Motivation to Work – Participation Tax Rates The non-working low-skilled have very little incentives to start working as half of their potential earnings would be forgone in higher taxes and lower benefits. The working low-skilled face the lowest effective taxation of all skill groups. The participation tax rate (PTR) is 36% for the low-skilled compared to 43% PTR for other groups (Table 21). However, if we look at the PTR for non-working individuals (describing the disincentives associated with the decision to start working), the low-skilled have by far the highest participation tax rates. The low-skilled PTR is as high as 50% if they start working full-time (compared to 43-46% for higher skill groups) and 48% if they start working part-time (compared to 39-44% for high skill groups). Therefore, if the low- skilled entered paid work, half of their potential full-time wage would be taken by the government in the form of income taxes, social security and health contributions, or in benefits they are no longer eligible for. The combined tax and benefit system thus provides very strong disincentives to work. The large difference between the PTRs of the working and non-working low-skilled is likely due to the fact that the group of working low-skilled is highly selective (the employment rate of the low-skilled is almost half of the overall employment rate, see above). Naturally, those with the lowest effective tax rates start working first. Thus, the working low-skilled are a specific group of people who have a low PTR and this makes them much more likely to enter the labor market.10 Table 21. PTR by Skill Level and Work Status Average PTR for working Average PTR for non-working (switch to full- time work) Average PTR for non-working (switch to part- time work) Low-skilled 0.364 0.502 0.478 Lower middle-skilled 0.43 0.435 0.389 Upper middle-skilled 0.432 0.434 0.408 High-skilled 0.43 0.464 0.443 Total 0.428 0.453 0.422 Source: TAXBEN model and SILC data 2016. 10 The level of PTR is affected not only by the potential wage, but also by other individual and household characteristics. Among the low-skilled, lower levels of PTR are likely to be present among individuals for whom the decision to work does not (substantially) affect the eligibility or amount of social benefits they collect. The main means-tested benefits in the Czech social assistance system are the housing benefit and child allowance. Thus, work incentives can be substantially affected by the level of housing costs and the number of children. 25