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Tax Policy Design and the Role of a Tax-Free Threshold

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  • John Creedy

    (Department of Economics, The University of Melbourne)

  • Nicolas Hérault

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

  • Guyonne Kalb

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

Abstract

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the taxfree threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.

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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 wp2008n13.

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Length: 29 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:iae:iaewps:wp2008n13

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Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
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Web page: http://www.melbourneinstitute.com/
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  1. John Creedy & Guyonne Kalb, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Melbourne Institute Working Paper Series wp2003n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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