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Why an Earned Income Tax Credit Program is a Mistake for Australia

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.

(This abstract was borrowed from another version of this item.)

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File URL: http://cbe.anu.edu.au/researchpapers/cepr/DP431.pdf
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Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 431.

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Length: 28 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:auu:dpaper:431
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  1. Apps, P.F. & Rees, R., 1998. "On the Taxation of Trade Within and Between Households," Papers 337, Australian National University - Department of Economics.
  2. William M. Gentry & Alison P. Hagy, 1995. "The Distributional Effects of the Tax Treatment of Child Care Expenses," NBER Working Papers 5088, National Bureau of Economic Research, Inc.
  3. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April.
  4. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  5. Peter Dawkins & David Johnson & Rosanna Scutella & Gillian Beer & Ann Harding, 1998. "Towards a Negative Income Tax System for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 31(3), pages 237-257.
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