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Why the Five Economists' Plan for a "Wage-Tax Trade-Off" is a Mistake for Australia

This paper presents an analysis of the Five Economists' plan for a "wage-tax trade-off", combining an EITC program with a freeze on award wage increases, as a policy package for reducing unemployment. The study identifies the changes in effective tax rates implied by the EITC program and shows that, when combined with a wage cut for the low paid, the proposed plan will increase inequality. Drawing on the findings of empirical research on behavioural responses to taxes, the study then goes on to show that the plan can be expected to reduce the efficiency and growth of the economy, due to disincentive effects on family labour supply, saving and fertility. The structure of the plan is found to have much in common with ongoing labour market and tax-benefit reforms. Both are identified as policy directions that are not in the interests of Australia, either domestically or within the context of globalisation.

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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 446.

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Length: 24 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:auu:dpaper:446
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  1. 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.
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