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Taxation, Labour Supply and Saving

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  • 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UK and Australia have lowered tax rates on high incomes and expanded tax credits and family transfer payments that are withdrawn on the joint income of a couple.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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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, 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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Keywords: Income taxation; family benefits; time allocation; labour supply; lifecycle saving; household production;

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  1. 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.
  2. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
  3. Richard Blundell & Martin Browning & Costas Meghir, 1993. "Consumer demand and the life-cycle allocation of household expenditures," IFS Working Papers W93/11, Institute for Fiscal Studies.
  4. Patricia Apps & Ray Rees, 2007. "The Taxation of Couples," CEPR Discussion Papers 559, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  5. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  6. Altug, Sumru & Miller, Robert A, 1998. "The Effect of Work Experience on Female Wages and Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 45-85, January.
  7. Eckstein, Zvi & Wolpin, Kenneth I, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 375-90, July.
  8. Apps,Patricia & Rees,Ray, 2009. "Public Economics and the Household," Cambridge Books, Cambridge University Press, number 9780521716284, October.
  9. Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-56, May.
  10. Kathryn Shaw, 1994. "The Persistence of Female Labor Supply: Empirical Evidence and Implications," Journal of Human Resources, University of Wisconsin Press, vol. 29(2), pages 348-378.
  11. Michael J. Boskin & Eytan Sheshinski, 1979. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  12. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April.
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