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Comparing Tax and Transfer Systems: How Might Incentive Effects Make a Difference?

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  • John Creedy
  • Peter Dawkins

Abstract

This paper compares a stylised version of a basic income flat tax system (BI/FT) with a means tested graduated tax system (MT/GT), with particular attention paid to potential labour supply effects of taxes. A highly simplified simulation model is developed in which individuals are homogeneous except for the wage they face, and there is a single means‐tested benefit. In this model, moving towards universal benefits can raise labour force participation and such effects can outweigh the labour supply reductions of working taxpayers. The number of losers is found to be quite small relative to the number of winners. If a fully universal system is not adopted, a move towards it, by reducing the taper on means tested benefits at the expense of a higher tax rate, can lead to significant winners without losers. These findings do not appear to be sensitive to assumptions about the individuals’ utility function defined over income and leisure.

Suggested Citation

  • John Creedy & Peter Dawkins, 2002. "Comparing Tax and Transfer Systems: How Might Incentive Effects Make a Difference?," The Economic Record, The Economic Society of Australia, vol. 78(240), pages 97-108, March.
    • Handle: RePEc:bla:ecorec:v:78:y:2002:i:240:p:97-108
    DOI: 10.1111/1475-4932.00042
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    Cited by:

    1. Rosanna Scutella, 2004. "Moves to a Basic Income-Flat Tax System in Australia: Implications for the Distribution of Income and Supply of Labour," Melbourne Institute Working Paper Series wp2004n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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