In this paper we discuss the role of tax and benefit systems in the context of the functioning of the labour markets and review recent progress made by EU Member States in reforming tax and benefit systems with a view to increasing economic incentives for higher employment and job creation. On the basis of the most recent comparable data and indicators, we try to assess whether concrete measures are being taken by Member States to alleviate the tax pressure on labour and especially on the low paid. We also examine benefit systems (especially unemployment benefit systems) with a view to evaluating recent reforms to increase employment incentives.

Our main conclusions are that while Member States have started to ease the tax burden on labour, progress on reforms has been unequal between tax and benefit systems: the emphasis has clearly been on the tax side while benefit reforms have mostly been relatively minor, and without adequate attention to the interaction between tax and benefit schemes. In view of the goal of full employment, to which the Union and the Member States are committed, it has become more urgent to speed up reforms of tax and benefit systems in order to increase labour supply and reduce structural unemployment. Further reforms aimed at making work pay should take a more comprehensive approach, including a review of the interaction between tax and benefit systems and their joint incentives to work. In general, further efforts are needed to reduce the overall generosity of benefit schemes, including eligibility rules, and to strengthen their interaction with active labour market policies in order to enhance the efficiency of active policies. This strategy could help to move people from benefit dependency to work, while preserving an adequate level of social protection for those in need.