A Bounded Index Test to make Robust Heterogeneous Welfare Comparisons

During last decade, improved macroeconomic and budgetary conditions have allowed for fiscal reforms in several EU countries. The main aim behind personal income tax reforms across Europe has been to reduce the tax burden on labour and to encourage work – especially for less productive workers. In this context, Anglo Saxon countries and more recently Continental European countries, including Belgium, have shown increasing interest in tax-benefit instruments awarding monetary transfers or tax reductions, conditional on employment. Using a discrete hours labour supply model, this paper assesses the impact of the 2001 Belgian Tax Reform on female labour supply. Results suggest that labour supply responses are moderate but significant by international standards. Yet, due to an uneven calibration of tax rebates and in-works benefits, the potential labour supply responses are rather dispersed over the whole range of the income distribution. Consequently, the gains from the reform do not appear to be evenly distributed across taxpayers.