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Taxation, Labour Supply and Saving

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  • Patricia Apps
  • Ray Rees

Abstract

In recent years, the US, UK and Australia have lowered tax rates on high incomes and expanded tax credits and family transfer payments that are withdrawn on the joint income of a couple. These reforms result in significant changes in the structure of marginal and average income tax rates. In this paper we present a case study that examines the impact of reforms of this kind on the structure of tax rates on incomes in Australia. We find that the reforms have led to high effective marginal rates across a wide middle band of earnings and to a shift towards joint taxation. As is well known, joint taxation results in high tax rates on secondary earners, with in consequence undesirable effects on both work incentive and fairness of the income distribution. A lifecycle analysis of time use and saving decisions indicates strong negative effects on female labour supply and household saving.

Suggested Citation

  • Patricia Apps & Ray Rees, 2008. "Taxation, Labour Supply and Saving," CEPR Discussion Papers 590, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  • Handle: RePEc:auu:dpaper:590
    as

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    File URL: https://www.cbe.anu.edu.au/researchpapers/cepr/DP590.pdf
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    References listed on IDEAS

    as
    1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, pages 1797-1855.
    2. Sumru Altu─č & Robert A. Miller, 1998. "The Effect of Work Experience on Female Wages and Labour Supply," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 45-85.
    3. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 57-80.
    4. Patricia Apps & Ray Rees, 2007. "The Taxation of Couples," Discussion Papers 07/21, Department of Economics, University of York.
    5. Boskin, Michael J. & Sheshinski, Eytan, 1983. "Optimal tax treatment of the family: Married couples," Journal of Public Economics, Elsevier, pages 281-297.
    6. Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-456, May.
    7. Apps,Patricia & Rees,Ray, 2009. "Public Economics and the Household," Cambridge Books, Cambridge University Press, number 9780521887878, December.
    8. 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.
    9. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
    10. Zvi Eckstein & Kenneth I. Wolpin, 1989. "Dynamic Labour Force Participation of Married Women and Endogenous Work Experience," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 375-390.
    11. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
    12. Kathryn Shaw, 1994. "The Persistence of Female Labor Supply: Empirical Evidence and Implications," Journal of Human Resources, University of Wisconsin Press, vol. 29(2), pages 348-378.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Income taxation; family benefits; time allocation; labour supply; lifecycle saving; household production;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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