In-Work Benefits for Married Couples: An Ex-Ante Evaluation of EITC and WTC Policies in Italy

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 12

38 Pages Posted: 4 Dec 2013

See all articles by Giuseppe De Luca

Giuseppe De Luca

University of Palermo

Claudio Rossetti

Luiss Guido Carli University

Daniela Vuri

University of Rome Tor Vergata; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: November 27, 2013

Abstract

This paper investigates labor supply and redistributive effects of in-work benefits for Italian married couples using a tax-benefit microsimulation model and a multi-sectoral discrete choice model of labor supply. We consider in-work benefits based on the Earned Income Tax Credit (EITC) and the Working Tax Credit (WTC) existing in the US and the UK, respectively. The standard design of these income support mechanisms is however augmented with a premium for two-earner households to avoid potential disincentive effects on secondary earners. Revenue neutral policy simulations show that our reforms may greatly improve the current Italian tax-benefit system in terms of both incentive and redistributive effects. Furthermore, neglecting sector-specific attributes of the various job opportunities may lead to an oversimplified representation of the choice set that does not allow to capture some labor market transitions and thus results in attenuated labor supply responses.

Keywords: In-work benefits, sectoral labor supply, poverty, microsimulation, married couples

JEL Classification: I38, H31, H53

Suggested Citation

De Luca, Giuseppe and Rossetti, Claudio and Vuri, Daniela, In-Work Benefits for Married Couples: An Ex-Ante Evaluation of EITC and WTC Policies in Italy (November 27, 2013). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 12, Available at SSRN: https://ssrn.com/abstract=2362809

Giuseppe De Luca (Contact Author)

University of Palermo ( email )

Viale delle Scienza
Palermo, 90128
Italy

Claudio Rossetti

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Daniela Vuri

University of Rome Tor Vergata ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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