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The Effect of a Reduced Allowance and Pension Taper Rate: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator

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  • Guyonne Kalb

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Hsein Kew

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper presents the results of two policy simulations for couples with and without children. The first policy involves a reduction of the highest withdrawal rate from 70 to 60 per cent. The second policy reduces all withdrawal rates of 70 and 50 per cent to 30 per cent. A comparison is made between the two policies to determine the magnitude of the impact on government expenditure and labour supply responses. Both policies have the effect of increasing the net income of those who are either partly relying on benefit payments or whose pre-reform income is just above the pre-reform cut-out points. Other people are unaffected, which means that overall government expenditure will increase. Behavioural simulations show that married men and women seem to be relatively unresponsive to the first policy. This implies that minor changes in the withdrawal rate do not seem to be effective. The second policy induces larger behavioural changes. The transition matrices suggest that married women are more responsive to a reduction in the taper rate than men. Overall, women are working less on average whereas men tend to work more on average. These results are similar to the effects found in the US and UK literature.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2002n25.

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Length: 33 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:iae:iaewps:wp2002n25

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  1. Alan Duncan & Mark N. Harris, 2001. "Simulating the Behavioural Effects of Welfare Reforms among Sole Parents in Australia," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2001n06, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. Guyonne Kalb & Rosanna Scutella & Hsein Kew, 2002. "Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2002n26, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  3. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  4. N. Eissa & H. W. Hoynes, . "The Earned Income Tax Credit and the Labor Supply of Married Couples," Institute for Research on Poverty Discussion Papers 1194-99, University of Wisconsin Institute for Research on Poverty.
  5. John Creedy & Guyonne Kalb & Hsein Kew, 2001. "The Effects of Flattening the Effective Marginal Rate Structure in Australia: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2001n10, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  6. Richard Blundell & Hilary W. Hoynes, 2004. "Has 'In-Work' Benefit Reform Helped the Labor Market?," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 411-460 National Bureau of Economic Research, Inc.
  7. Guyonne Kalb, 2002. "Estimation of Labour Supply Models for Four Separate Groups in the Australian Population," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2002n24, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  8. John Creedy & Guyonne Kalb & Hsein Kew, 2001. "The Melbourne Institute Tax and Transfer Simulator (MITTS)," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2001n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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Cited by:
  1. Guyonne Kalb, 2002. "Estimation of Labour Supply Models for Four Separate Groups in the Australian Population," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2002n24, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. Robert Breunig & Deborah A. Cobb-Clark & Xiaodong Gong, 2008. "Improving the Modelling of Couples' Labour Supply," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 84(267), pages 466-485, December.
  3. Guyonne Kalb & Rosanna Scutella & Hsein Kew, 2002. "Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2002n26, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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