Tax-Benefits Reforms and the Labor Market: Evidence from Belgium and Other EU Countries

33 Pages Posted: 30 Apr 2006

Date Written: February 22, 2006

Abstract

During the last decade, several EU countries have tried to tackle unemployment and low activity rates through extensive tax cuts. In an effort to encourage the taking up of work - especially amongst the less productive workers - policymakers have shown increasing interest in targeted tax and social security contribution rebates as well as in benefits conditional on being in employment. This paper surveys recent tax-benefit reforms in Germany, the Netherlands, Italy, The UK, France and Belgium, focusing in particular on the reforms carried out in the latter. The potential labor supply effect of the Belgian reforms are assessed via a discrete hours labor supply model. The results are then compared to similar evaluations of reforms implemented in the aforementioned countries. Results suggest that: (i) generalized tax cut are not always effective in stimulating labor supply; (ii) in several central continental Europe, social security contributions play a major role in determining the incentives to take up work; (iii) joint assessment of income for both purposes of taxation and benefit eligibility has unambiguous negative effects on the labor supply of secondary earners (i.e., mostly women); (iv) targeted reductions in taxes and social security contributions, as well as benefits conditioned on employment are effective means to promote employment; but (v) efficient design of these policies is of greatest importance in order to counter potential negative incentive effects on the population already in employment.

Keywords: Tax-benefit Systems, Microsimulation, Household Labour Supply, Multinomial Logit

JEL Classification: D31, H21, H23, H24, H31, J22

Suggested Citation

Orsini, Kristian, Tax-Benefits Reforms and the Labor Market: Evidence from Belgium and Other EU Countries (February 22, 2006). Available at SSRN: https://ssrn.com/abstract=898847 or http://dx.doi.org/10.2139/ssrn.898847

Kristian Orsini (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

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