Abstract
Abstract In this study we assess the impact of the Working Income Tax Benefit (WITB) on labour supply, GDP and income distribution in Canada, using a general equilibrium microsimulation model. We also estimate labour supply and demand elasticities using survey data to ensure that households’ behaviour is properly captured in the model. Simulation results show that the WITB affects particularly labour market participation of low- and medium-skilled lone-parents families. These positive effects on labour supply translate into higher after-tax incomes leading to a decline in low-income rates and low-income gaps. Our findings suggest that enhancing the WITB could provide additional income support to working Canadian families while reducing work disincentives for those trapped behind the welfare wall. JEL classification C15, D33, D58, J08, I32, O51
Highlights
In 2007 the federal government introduced a new work incentive, the Working Income Tax Benefit (WITB), to encourage individuals to enter the workforce and to reduce pressures on social programs
What would be the impact of these work incentives on net labour supply if general equilibrium effects are taken into account? And what would be the impact of a rise in labour supply on low-income earners when indirect effects, such as a decline in wage rates, are accounted for? In an attempt to provide answers to these questions, we conduct policy simulations with a newly developed general equilibrium model with nearly 30,000 families to assess the net impact of this refundable tax credit on households’ labour market participation, low-income families and income distribution
Robustness analysis Given that low-income rates are sensitive to the choice of low-income measures (LIM), we examine in what follows the difference between cumulative distribution functions before and after the introduction of the WITB, often referred to as poverty dominance analysis
Summary
In 2007 the federal government introduced a new work incentive, the Working Income Tax Benefit (WITB), to encourage individuals to enter the workforce and to reduce pressures on social programs. In the present research paper, we fill this literature gap by developing a microsimulation general equilibrium model to simulate the impacts of this in-work tax credit on employment and low-income families. This methodology is very appropriate as it enables assessing the impact on labour supply and income at the family level while taking into account general equilibrium effects on wages. The analysis of policy simulations at the household level involves modeling sectoral labour and capital markets which allow a better assessment of general equilibrium effects on wages and investment income. The nominal exchange rate is chosen as the numéraire in each period
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