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Moves to a Basic Income-Flat Tax System in Australia: Implications for the Distribution of Income and Supply of Labour

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  • Rosanna Scutella

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

Problems with work disincentives and poverty traps apparent in the Australian tax-transfer system have led to a renewed debate about the advantages of universal benefits relative to means-tested benefits. This paper examines the implications of moving to a system where benefits are universal and the marginal tax rate schedule is simplified to a constant rate, refered to as a basic income — flat tax system. The Melbourne Institute Tax Transfer Simulator(MITTS), a behavioural micro-simulation model of the Australian tax-transfer system is used to examine the distributional,labour supply and government expenditure effects of moving to a basic income—flat tax system. Providing basic income levels that coincide with current benefit rates is costly, with a marginal tax rate of over fifty percent required for revenue neutrality. Such a system, while equitable, is found to reduce labour supply. If a version to inequality is high, this system is found to be socialy optimal, even after reductions in labour supply. Decreases in the marginal tax rate improve work incentives and increase the supply of labour, but increase inequality and impose a significant cost burden on government. A decline in the level of basic income of at least half is required to fund a reduction in the marginal tax rate to thirty percent. While the distortions to behaviour are minimal with this final system, it is extremely inequitable and social welfare reducing, even after a counting for changes in labour supply.

Suggested Citation

  • Rosanna Scutella, 2004. "Moves to a Basic Income-Flat Tax System in Australia: Implications for the Distribution of Income and Supply of Labour," Melbourne Institute Working Paper Series wp2004n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2004n05
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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2004n05.pdf
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    References listed on IDEAS

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    1. Creedy, John, 1997. "Evaluating Alternative Tax and Transfer Schemes with Endogenous Earnings," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 43-56, January.
    2. Lei Lei Song, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    3. Creedy, John & Dawkins, Peter, 2002. "Comparing Tax and Transfer Systems: How Might Incentive Effects Make a Difference?," The Economic Record, The Economic Society of Australia, vol. 78(240), pages 97-108, March.
    4. Creedy, John, 1998. "Means-Tested versus Universal Transfers: Alternative Models and Value Judgements," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(1), pages 100-117, January.
    5. Guyonne Kalb & Rosanna Scutella, 2002. "Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply," Melbourne Institute Working Paper Series wp2002n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    6. Creedy, John, 1996. "Comparing Tax and Transfer Systems: Poverty, Inequality and Target Efficiency," Economica, London School of Economics and Political Science, vol. 63(250), pages 163-174, Suppl..
    7. Barr, N A, 1975. "Negative Income Taxation and the Redistribution of Income," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 37(1), pages 29-48, February.
    8. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    9. Guyonne Kalb, 2002. "Estimation of Labour Supply Models for Four Separate Groups in the Australian Population," Melbourne Institute Working Paper Series wp2002n24, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    10. John Creedy, 1995. "Alternative Social Welfare Systems: Means-Tested versus Universal Benefits," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 28(3), pages 88-93.
    11. John Creedy & Rosanna Scutella, 2003. "The Role of the Unit of Analysis in Tax Policy Reform Evaluations," Melbourne Institute Working Paper Series wp2003n28, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    12. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
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    Cited by:

    1. Ugo Colombino, 2015. "Is unconditional basic income a viable alternative to other social welfare measures?," IZA World of Labor, Institute for the Study of Labor (IZA), pages 128-128, February.
    2. repec:eme:ceapzz:s0573-855520140000293006 is not listed on IDEAS
    3. James Browne & Herwig Immervoll, 2017. "Mechanics of replacing benefit systems with a basic income: comparative results from a microsimulation approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(4), pages 325-344, December.
    4. Ugo Colombino, 2015. "Five Crossroads on the Way to Basic Income. An Italian Tour," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 353-389, November.
    5. 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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