British Tax Credit Reform: Labour Market Outcomes and Beyond

Paul Fisher
University of Essex, UK

The UK recently saw extensive reform of its in work-benefit system with the replacement of the Working Families Tax Credit with two new tax credits: The Working Tax Credit and Child Tax Credit. The reform simplified and expanded child related support and above this radically extended in-work tax-credits to those without children. This paper provides the first evaluation of the reform for a sample of couples with children and contributes to the wider literature on in-work benefits for couples whom relative to single mothers, have received less attention in the welfare reform literature. The new tax credits could induce a number of behavioural responses. As noted by Blundell and Walker (2001), and Grogger and Karoly (2009) little is known about the impact of welfare reforms on behavioural outcomes beyond the labour market. The analysis therefore extends beyond the labour market and considers the wide consequences of the reform including fertility, divorce, childcare usage, benefit take-up in addition to labour market outcomes. A novel difference in difference strategy is used which takes advantage of the panel nature of the British Household Panel Survey to compare those in the bottom quartile of the fathers pre-reform income distribution to those in the inter-quartile range.

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