Centrum Analiz Ekonomicznych

Microsimulation Report 01/10

Distributional effects of the Polish Child Tax Credit and its potential reforms.

Leszek Morawski, Michał Myck

Abstract:

The Polish Child Tax Credit (CTC) in operation today differs substantially in its generosity and distributional implications from the original policy proposals. While initially designed as an instrument to target low income working families, the credit was implemented as a tax credit without any upper earnings limit, and its generosity was substantially extended in autumn 2007 implying an annual cost of about 0.5% of the Polish GDP. The current design grants highest gains in absolute terms to families in the upper half of the income distribution, while proportionally gains are most significant for those in the middle of the distribution. Households with children in the bottom decile of the income distribution gain on average about 7.60PLN per month, and those in the top 40% of the distribution gain over a hundred zloty per month on average. The paper also considers effects of potential reforms of the CTC aimed at reducing its cost. The recently discussed eligibility limitation to families with three or more children, would reduce the cost of the policy by between 80% and 90%, while a simulated reduction of generosity of the credit by 50%, would save the government about 2.2bn PLN per year. The latter policy would leave the incomes of families with children in the bottom deciles largely unchanged, and it would reduce the benefits from the credit to households in the upper half of the income distribution by about 50% on average.

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