The impact of tax benefits on female labor supply and income distribution in Spain

Abstract

Tax benefits targeted to low-wage workers have become very common transfer programs that seek to meet both efficiency and equity targets. An expanding literature has assessed the effects of these policies on income distribution and labor supply showing important implications for female labor participation. In this paper, we estimate the distributional and behavioral impacts of a simulated new benefit in Spain based on the replacement of the existing working mother tax credit (WMTC) using as a reference the US Earned Income Tax Credit (EITC). We simulate the effects of the proposed scheme using EUROMOD and a discrete choice model of labor supply. Our results show that the enhancement of the proposed reform would have significant and positive effects both in terms of female labor participation and inequality and poverty reduction. The introduction of this benefit would generate a substantial increase in labor participation at the extensive margin and a non-negligible reduction at the intensive margin.