In-Work Benefits for Married Couples: an Ex-Ante Evaluation of EITC and WTC Policies in Italy

This paper investigates labor supply and redistributive effects of in-work benefits for Italianmarried couples using a tax-benefit microsimulation model and a multi-sectoral discrete choice model of laborsupply. We consider in-work benefits based on the Earned Income Tax Credit (EITC) and the Working TaxCredit (WTC) existing in the US and the UK, respectively. The standard design of these income supportmechanisms is however augmented with a premium for two-earner households to avoid potential disincentiveeffects on secondary earners. Revenue neutral policy simulations show that our reforms may greatly improvethe current Italian tax-benefit system in terms of both incentive and redistributive effects. Furthermore,neglecting sector-specific attributes of the various job opportunities may lead to overstated estimates of thepolicy effects.