The Redistributive Effect of Selected Australian Taxes and Transfers on Annual and Lifetime Inequality

This paper uses a dynamic cohort lifetime simulation model in order to examine the redistributive effect on annual and lifetime inquality of a range of taxes and transfers in Australia. The model allows for family formation births of children, labour force participation of males and females, along with income dynamics. The earnings of wives have an equalising effect on unadjusted household annual income inequality, while equivalent adult household annual incomes are more unequal than male incomes, particularly during the middle years of the life cycle. However, equivalent adult lifetime pre-tax incomes are only slightly more unequal than household incomes (and less than that of male incomes), while post-tax and transfer equivalent adult lifetime incomes are less unequal than household incomes. Lifetime inequality is lower than in any single year; this is partly attributed to the inclusion of the unemployment in the population. The inequality reducing effect of taxes is smaller in the lifetime than in the annual context and the income tax system has substantially the largest redistributive effect on lifetime incomes.