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Welfare-improving income tax reforms: a microsimulation analysis

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  • John Creedy
  • Nicolas Hérault

Abstract

Extensive research has shown that few robust results regarding the optimal tax structure are available. Moreover, the stylized models used in optimal tax analyses are not appropriate for practical policy advice. This paper proposes a method of examining income tax reforms designed to move towards an optimal structure. It uses a behavioural microsimulation model 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 welfare changes for the Australian income tax structure are not symmetric with respect to increases and decreases in tax rates. In addition, the extent of inequality aversion was found to play a much larger role in the determination of the direction of tax rate changes than the form of the welfare metric or the specification of adult equivalence scales. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.

Suggested Citation

  • John Creedy & Nicolas Hérault, 2012. "Welfare-improving income tax reforms: a microsimulation analysis," Oxford Economic Papers, Oxford University Press, vol. 64(1), pages 128-150, January.
  • Handle: RePEc:oup:oxecpp:v:64:y:2012:i:1:p:128-150
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    File URL: http://hdl.handle.net/10.1093/oep/gpr029
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    1. repec:eme:ceapzz:s0573-855520140000293006 is not listed on IDEAS
    2. Creedy, John, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Working Paper Series 2851, Victoria University of Wellington, Chair in Public Finance.
    3. André Decoster & Peter Haan, 2015. "Empirical welfare analysis with preference heterogeneity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(2), pages 224-251, April.
    4. Olivier Bargain & André Decoster & Mathias Dolls & Dirk Neumann & Andreas Peichl & Sebastian Siegloch, 2013. "Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(4), pages 789-817, October.
    5. Alan Krause, 2014. "Piecewise Linear Income Tax Reforms," Discussion Papers 14/25, Department of Economics, University of York.
    6. Bosmans, Kristof & Decancq, Koen & Ooghe, Erwin, 2018. "Who's afraid of aggregating money metrics?," Theoretical Economics, Econometric Society, vol. 13(2), May.
    7. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis,in: Handbook of Microsimulation Modelling, volume 127, pages 167-221 Emerald Publishing Ltd.

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