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The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?

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This paper addresses an important policy question: who gets the largest utility gain from income and does the tax system adequately reflect this? We address this question by using Australian panel data and taking life satisfaction as a proxy for utility, allowing us to identify the marginal utility of additional income for different groups of individuals. We find that optimal transfers consist of transfers from the old to the middle aged, and from the married to the unmarried. This optimal utilitarian welfare policy is then contrasted with information on who actually receives transfers and who pays for them in Australia, where we find that taxes are too high for some groups, like the young, and that they are too low for other groups, like the elderly. We believe that the methodology developed in this paper could be fruitfully applied to the issue of optimal taxation in other countries.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 450.

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Date of creation: 31 Jan 2012
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Handle: RePEc:qld:uq2004:450

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Cited by:
  1. Bodo Knoll & Hans Pitlik, 2014. "Who Benefits from Big Government? A Life Satisfaction Approach," WWWforEurope Policy Paper series 14, WWWforEurope.

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