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

During the last decade, several EU countries have tried to tackle unemployment and low activity rates through extensive tax cuts. In an efiort 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 beneflts conditional on being in employment. This paper surveys recent tax-beneflt reforms in Germany, the Netherlands, Italy, The UK, France and Belgium, focussing in particular on the reforms carried out in the latter. The potential labor supply efiect 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 efiective 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 beneflt eligibility has unambiguous negative efiects on the labor supply of secondary earners (i.e. mostly women); (iv) targeted reductions in taxes and social security contributions, as well as beneflts conditioned on employment are efiective means to promote employment, but (v) e‐cient design of these policies is of greatest importance in order to counter potential negative incentive efiects on the population already in employment.