The design of in-work benefits: how to boost employment and combat poverty in Belgium

In-work benefits have received increased attention over the past decades in OECD countries, as a core part of making-work-pay policies. They have two main objectives: on the one hand, increase employment by creating additional financial rewards for remaining in work or for taking up a low-paid job. On the other hand, reduce poverty by increasing incomes of disadvantaged groups of workers and their families. Both objectives of enhancing employment and reducing poverty have been extensively analysed for several countries. Most papers in this domain have investigated existing in-work benefits (for an overview see e.g. Kenworthy, 2015). We take a different approach as we evaluate the impact of different design components on work incentives and poverty indicators by building step-by-step a stylised working tax credit. By different design components we mean: is the working tax credit individual or household based? What is the impact of using an income threshold? What happens when a tapering-out or a tapering-in is implemented? The main question of this paper is thus whether and how the design of a working tax credit has an impact on work incentives and poverty figures. The focus of our analysis is Belgium, a country with a less dispersed income distribution as e.g. the United Kingdom or the USA (which are the countries who first implemented in-work benefits and for which the bulk of the evaluations have been done). We make use of BE-SILC 2012 data and built a discrete labour supply model to evaluate the impact of the design of an in work-benefit on work incentives. Simulations are done using the microsimulation model EUROMOD.