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Why an Earned income tax credit program is a mistake for Australia

Author

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  • Patricia Apps

    (University of Sydney)

Abstract

This paper examines the distributional and efficiency effects of an Earned Income Tax Credit (EITC) program of the kind being strongly advocated for Australia by a number of economists. The paper presents an empirical analysis of the Family Tax Credit proposed by the Australian Labor Party at the time of the 1998 election, as a case study. The results show that, due to the structure of effective tax rates implied by the program, introducing such a system would lead to a large shift in the overall burden of taxation to low and median wage two earner families. Drawing on the findings of empirical research on behavioural responses to taxes, the paper goes on to explain why the program can also be expected to lead to a fall in labour supply and household saving. Thus there is reason to be critical of the impact of the policy both on economic growth and on equity of the income distribution.

Suggested Citation

  • Patricia Apps, 2002. "Why an Earned income tax credit program is a mistake for Australia," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 5(4), pages 549-568, December.
    • Handle: RePEc:ozl:journl:v:5:y:2002:i:4:p:549-568
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    Cited by:

    1. Sandra Dandie & Joseph Mercante, 2007. "Australian labour supply elasticities: Comparison and critical review," Treasury Working Papers 2007-04, The Treasury, Australian Government, revised Oct 2007.
    2. Patricia Apps & Ray Rees, 2005. "Gender, Time Use, and Public Policy over the Life Cycle," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(3), pages 439-461, Autumn.
    3. Patricia Apps, 2006. "Family Taxation: An Unfair and Inefficient System," CEPR Discussion Papers 524, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    4. Peter Dawkins, 2002. "The 'Five Economists' Plan: The Original Idea and Further Developments," CEPR Discussion Papers 450, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    5. Peter B. Dixon & Maureen T. Rimmer, 2003. "A New Specification of Labour Supply in the MONASH Model with an Illustrative Application," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(1), pages 22-40, March.

    More about this item

    Keywords

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    JEL classification:

    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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