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)
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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 tax and benefit system with 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. Four alternative policy changes, each involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality, were examined using the Melbourne Institute Tax and Transfer Simulator. A range of implications were examined, including labour supply responses to tax changes, and the effects of policy changes on inequality and social welfare. The results demonstrate that it is possible to eliminate the taxfree threshold under approximate overall revenue and distribution neutrality, but that it is impossible to improve labour supply incentives at the same time. In order to achieve improved incentives, either revenue or distribution neutrality has to be sacrificed.
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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
wp2008n15.
Length: 29 pages Date of creation: Aug 2008 Date of revision: Handle: RePEc:iae:iaewps:wp2008n15
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