In-work tax credits in Belgium: an analysis of the Jobkorting using a discrete labour supply model

In line with the Earned Income Tax Credit in the United States and the Working Family Tax Credit in the United Kingdom, the Flemish government implemented in 2007 a similar in-work tax credit in order to increase the employment rate and to make working financially more attractive. This paper investigates how total labour supply changes and checks if the cost reductions due to these behavioural reactions are large enough to defend such expensive policies. It appears that married women alter their labour supply decision the most. However, due to the small tax credit, total labour supply effects are of minor size and hardly offset the large costs. Only a more generous tax credit leads to a higher activation of unemployed, however the budgetary cost is huge