Modelling labour supply and policy reform in the Belgian tax benefit model MIMOSIS

Decoster, A., De Swerdt, K., Van Camp G. (2010). Modelling labour supply and policy reform in the Belgian tax benefit model MIMOSIS, Final Report (Part 2) of the project “Belasting op arbeid en mogelijke arbeidsaanbodreacties” funded by FPS Social Security Leuven, KULeuven CES, 1-33pp.

Labour market policies with high budgetary cost are often advocated with the argument that the reform will partly or even largely be self-financing. The reform is assumed to induce currently inactive individuals to enter the labour market and to induce the currently active population to increase the number of hours worked. This would result in a positive effect on government revenue through higher personal income taxes and social security contributions and hence partly or largely cover the cost of the policy.
In this report we estimate a labour supply model to incorporate labour supply reactions in an evaluation of three policy reforms. We analyse to what extent integration of labour supply in the microsimulation model MIMOSIS adds to the overall evaluation of these policy reforms.The analysed are a reduction in social security contributions for the lower-skilled (workbonus), a general reduction of personal income taxes for the working population, and a reduction in personal income taxes which is targeted at the same lower-skilled population as the workbonus.
We find that, for the policies we analysed, incorporating labour supply reactions does hardly affect the initial cost of the different programs. We thus find that the cost recovery potential of the reforms is limited using the model specification and methodology used in this report.