Evaluating the Working Families Tax Credit

We examine the labour market impact of the Working Families Tax Credit a financial incentive programme to enhance income and encourage work in low income families, recently introduced in the UK. Family labour supply behaviour is modelled as a discrete choice among a finite set of hours alternatives. We allow for fixed costs, program participation and childcare. The relaibility of this structural model is compared with a difference-in-differences estimator based on previous tax credit reforms. The results highlight the importance of interactions with other components of the tax and benefit system. We find moderately sized positive employment responses. Acknowledgements: We are grateful to Mike Brewer, Bruce Meyer, Jim Heckman, Roger Gordon, Julian McCrae, Howard Reed and Ian Walker for useful comments. This study is part of the research program of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at the IFS. We are responsible for all errors and interpretations. ∗University College London and Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE, United Kingdom, [email protected] †University of Nottingham and Institute for Fiscal Studies. ‡University College London and Institute for Fiscal Studies