This paper estimates the effect of income taxation and transfers on labour supply at the extensive
margin, i.e., the labour force participation. We extend existing structural form methodologies
by considering the effect of both taxes and transfers. Non-labour income contains the (hypothetical)
transfer amount someone gets when out of work, while the wage is replaced by the difference
between net wages and the amount of lost transfers due to taking up a job (gains to work). To
incorporate these components of the budget set, we employ a detailed tax-benefit model. Using
data from the Hungarian Household Budget Survey (HKF), we find that participation probabilities
are strongly influenced by transfers and the gains to work, particularly for low-skill groups
and the elderly. Moreover, the same change in the net wage leads to a much larger change in the
gains to work for low earners, making them even more responsive to wages and taxation. Overall,
we find that a single equation can capture a large heterogeneity of individual responsiveness
to taxes and transfers. Our parametric estimates can be readily utilized in welfare evaluations, or
microsimulation analyses of tax and transfer reforms