Israeli child allowances
Introduction
Kott (2022) computes the MVPF of child allowances (child cash benefits) in Israel. Through this policy, all families with children in Israel are eligible to receive a monthly child allowance; the policy has a near universal uptake. Prior to 2003, allowances were dependent on birth order following the birth of the third child in a family. For example, families with 3 or more children were eligible to receive more money per month per child than smaller families with 2 or less children. A 2003 reform aimed to cutback public spending on child allowances by making payments independent of birth order; any child born after June 1, 2003, was to receive a flat standard monthly allowance.
The analysis sample includes all children from families with a high-order birth between January 1 and October 31, 2003, as well as their older siblings. This captures 5 months before and after the cut off-date of June 1, 2003. The paper uses a 2-stage regression discontinuity design to exploit the income shock at the family level induced by the reform to estimate the causal effects on long run educational outcomes of the children in the sample families.
The paper finds that when faced with a negative income shock, the affected families choose to send their children to less academically rigorous religious schools that provide extensive services, such as free meals and transportation, to mitigate the effect of lost income. As students at religious schools are less likely to matriculate high school, the paper’s findings suggest children that switched schools will have reduced future earnings potential.
MVPF = 4.1
Net Cost
The net cost consists of two pieces: the direct cost of the allowances, and the fiscal externalities that result from changes in lifetime earnings.
The direct costs capture the total cost incurred by the government from paying out allowances per individual child. The paper estimates the direct costs assuming $1,000 is paid out in $1,000 payments over ten years. Assuming a discount rate of 3%, this yields a total direct cost of $878.61.
The indirect costs capture the impact of the allowance on future earnings (and therefore future tax remittances). The paper uses estimates from Lavy et al. (2020) to translate this into future earnings. Lavy et al. (2020) find that a 1 percentage point increase in matriculation yields an additional $75 in average annual income. Kott (2022) estimates that, on average, an additional $1,000 in exposure to child allowances increases high school matriculation by 1.4 percentage points. This estimate combined with the relationship between earnings and matriculation from Lavy et al. (2020) suggests that an additional $1,000 in exposure to child allowances would lead to 1.4 * $75 = $105 in additional annual income, on average. To turn this into stream of lifetime earnings, the paper assumes this effect would hold from ages 16 to 59, and then discounts that sum back to present value terms using a discount rate of 3%. This yields an increase in future earnings of $1,683.67. Assuming a tax rate of 20%, this yields an increase in tax remittances of 20% * $1,683.67 = $336.73.
The net cost is then $878.61 – $336.73 = $541.88.
Willingness to Pay
The allowances are a direct cash transfer. As a result, the willingness to pay is equal to the value of the transfer to the families ($878.61) plus the discounted additional post-tax earnings from matriculation that are ultimately earned by the children ($1,683.67 – $336.73 = $1,346.93):
$878.61 + $1,346.93 = $2,225.54.
MVPF Summary
The MVPF then is $2,225.54/$541.88 = 4.11.
References
Assaf Kott (2022). “Income Shocks, School Choice, and Long-Term Outcomes: Lessons from Child Allowances in Israel.” Working paper. https://assafkott.github.io/JMP/JMP.pdf
Victor Lavy, Assaf Kott, and Genia Rachkovski (2022). “Does Remedial Education in Late Childhood Pay Off After All? Long-Run Consequences for University Schooling, Labor Market Outcomes, and Intergenerational Mobitliy.” Working paper. https://www.nber.org/system/files/working_papers/w25332/w25332.pdf
Policy Features
- Category
- Taxes
- Sub-Category
- Cash Transfers
- Beneficiary Type(s)
- Adults, Parents
- Country of Implementation
- Israel
- Empirical Method
- Regression Discontinuity
- Research Type
- Primary
- Peer Reviewed
- No
- MVPF Publication Link
- assafkott.github.io/JMP/JMP.pdf