Estimates of labour supply effects of recent UK reforms in the area of direct taxes and benefits show that policy can have significant influence on the level of employment. We confirm this in a simulation of in-work support system introduced into the German tax and benefit system. Our simulation results suggest that introducing in-work Tax Credits in Germany would increase employment of single individuals by over 100,000 but it would result in a reduction of labour supply among individuals living in couples by about 70,000. We find that Tax Credits would result in significant reductions of labour supply both among women and men in two earner couples. The result found for men is especially important as it is markedly different from all results found for the UK, where the overall response among men has always been found positive. Our estimation results call for a high degree of caution as far as "importing" UK-style Tax Credits to Germany is concerned. In-work support based on family income would reinforce the existing work disincentives for secondary earners through joint income taxations, reducing the employment levels of both men and women living in couples.
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number
555.
Length: 32 p. Date of creation: 2006 Date of revision: Publication status: Published in: Fiscal Studies 28(2007), No.1, 43-72 Handle: RePEc:diw:diwwpp:dp555
Find related papers by JEL classification: C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
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