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Taxation, Labour Supply and Saving

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Author Info
Patricia Apps
Ray Rees
Abstract

In recent years, the US, UK and Australia have lowered tax rates on high incomes and expanded tax credits and family transfer payments that are withdrawn on the joint income of a couple. These reforms result in significant changes in the structure of marginal and average income tax rates. In this paper we present a case study that examines the impact of reforms of this kind on the structure of tax rates on incomes in Australia. We find that the reforms have led to high effective marginal rates across a wide middle band of earnings and to a shift towards joint taxation. As is well known, joint taxation results in high tax rates on secondary earners, with in consequence undesirable effects on both work incentive and fairness of the income distribution. A lifecycle analysis of time use and saving decisions indicates strong negative effects on female labour supply and household saving.

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Paper provided by Centre for Economic Policy Research, Research School of Social Sciences, Australian National University in its series CEPR Discussion Papers with number 590.

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Date of creation: Dec 2008
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Handle: RePEc:auu:dpaper:590

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Related research
Keywords: Income taxation; family benefits; time allocation; labour supply; lifecycle saving; household production;

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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References listed on IDEAS
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  1. Patricia Apps & Ray Rees, 2007. "The Taxation of Couples," CEPR Discussion Papers 559, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
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  2. Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 57-80, January. [Downloadable!] (restricted)
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  3. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
    Other versions:
  4. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August. [Downloadable!] (restricted)
  5. Altug, Sumru & Miller, Robert A, 1998. "The Effect of Work Experience on Female Wages and Labour Supply," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 45-85, January. [Downloadable!] (restricted)
  6. Eckstein, Zvi & Wolpin, Kenneth I, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 375-90, July.
  7. Nada Eissa & Hilary W. Hoynes, 2006. "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 73-110 National Bureau of Economic Research, Inc. [Downloadable!]
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