Household labour supply, childcare costs and in-work benefits: modelling the impact of the working families tax credit in the UK. Unpublished paper, Institute for Fiscal Studies

The UK Government is planning to replace Family Credit, the existing system of in-work support for families with children, by a new tax credit, the Working Families Tax Credit (WFTC) to be paid directly through the income tax system. This tax credit includes a generous childcare tax credit component, making childcare more affordable to working households on low incomes. In this paper we model the impact of the WFTC on work incentives and on use of childcare services. Household labour supply is modelled as a discrete choice among a finite set of hours alternatives. Our estimation strategy control explicitly for fixed and child-related costs, and allows for random preference heterogeneity, state-specific errors in perception, and local variations in the provision and cost of childcare services. In simulation we find small positive behavioural responses in aggregate to the introduction of the new tax credi