We use a large and rich administrative household panel data set to estimate labour supply responses for a large number of subgroups in the Netherlands. The identification of the parameters benefits from a major tax reform in the data period. We uncover large differences in behavioural responses. In particular, we find differences in labour supply responses between households with and without children that are much bigger than suggested by previous studies that had to pool these household types in the estimation of preferences. An efficient tax-benefit system should take the substantial heterogeneity in behavioural responses into account.

Income tax is becoming very complex, as a result of the increasing use of income-dependent tax credits and tax rebates. As a result, it can be very difficult for households to assess the consequences on their tax liabilities of, for example, changes in their wages or household situation. Specific parts of the tax system can be simplified with limited redistributional consequences. In particular, the complex system of income-dependent tax rebates for rent, health, and children can be greatly simplified with a single tax rebate, with the same income thresholds, a single phase-out rate, and a uniform means test. Any adverse distributional effects can be remedied via the tax or benefit system. Furthermore, the income-dependent general tax credit can be made independent from income using suitable adjustments in tax rates and the tax credit for the elderly without any noticeable distributional impacts.