A Tax Benefit Model for Policy Evaluation in Luxembourg: LuxTaxBen

Abstract

This paper presents a new tax benefit microsimulation model for Luxembourg. The main distinguishing feature of the model is that it includes a behavioural module for labour supply. We validate our model by comparing incomes, taxes, and transfers produced with those of EU-SILC and EUROMOD. The labour supply model is validated by studying the fit (comparing observed hours of labour with those predicted by the model). Wage elasticities are reported and compared with similar exercises in the literature. Finally, the model is used for assessing a recent switch of the Luxembourg tax system from joint to individual taxation. By comparing simulated non-behavioural output it is shown that, as a whole, LuxTaxBen produces an output very close to that produced by EUROMOD and EUSILC. Further, the behavioural simulation suggests that the reform has no impact on the labour supply for males in couple while a significant number of inactive females change their inactivity status and start working due to the reform. It is also shown that the change in the labour income increases by 0.8% while the welfare dependence decreases by -0.6 due to move from joint to individual tax rules.