Optimal Marginal Income Tax Reforms: A Microsimulation Analysis
AbstractExtensive research has shown that few robust results regarding the optimal tax structure are available. Moreover, the stylised models used in optimal tax analyses are not appropriate for practical policy advice. This paper proposes a method of examining optimal marginal income tax reforms using behavioural microsimulation models in which the full extent of population heterogeneity is represented along with all the details of highly complex tax and transfer systems. The approach is illustrated using the Australian microsimulation model MITTS. The results show that the marginal welfare changes for the Australian income tax structure are not symmetric with respect to increases and decreases in tax rates, largely because of the asymmetry in tax revenue changes arising from differential labour supply effects in different ranges of the income distribution. In addition, the extent of inequality aversion was found to play a much larger role in the determination of the optimal direction of rate changes than the form of the welfare metric or the specification of adult equivalence scales.
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Bibliographic InfoPaper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2009n23.
Length: 28 pages
Date of creation: Aug 2009
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This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-08-30 (Accounting & Auditing)
- NEP-ALL-2009-08-30 (All new papers)
- NEP-CMP-2009-08-30 (Computational Economics)
- NEP-PUB-2009-08-30 (Public Finance)
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