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The Personal Income Tax Structure: Theory and Policy

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  • John Creedy

Abstract

There is now a large and complex literature on optimal income taxation, within the context of second-best welfare economics. This paper considers the potential role of this analysis in the practical design of direct tax and transfer structures. It is stressed that few results are robust, even in simple models, in view of the important role played by alternative social welfare functions, the nature of the distribution of abilities and the preferences of individuals. In view of these negative results, it is suggested that a range of empirical tax analyses, capturing particular issues, can provide helpful guidance for policy analysts. Numerical illustrations are provided, paying attention to the role of a ‘top’ marginal tax rate applied to higher-income groups. In particular, behavioural microsimulation models can be used to examine marginal direct tax reform. Such models have the advantages of capturing the full extent of population heterogeneity and the complexity of the tax structure.

Suggested Citation

  • John Creedy, 2009. "The Personal Income Tax Structure: Theory and Policy," Department of Economics - Working Papers Series 1063, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1063
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    References listed on IDEAS

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    1. Kanbur, Ravi & Keen, Michael & Tuomala, Matti, 1994. "Optimal non-linear income taxation for the alleviation of income-poverty," European Economic Review, Elsevier, vol. 38(8), pages 1613-1632, October.
    2. Creedy, John, 1998. "The Optimal Linear Income Tax Model: Utility or Equivalent Income?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(1), pages 99-110, February.
    3. Peter, Klara Sabirianova & Buttrick, Steve & Duncan, Denvil, 2010. "Global Reform of Personal Income Taxation, 1981–2005: Evidence From 189 Countries," National Tax Journal, National Tax Association, vol. 63(3), pages 447-478, September.
    4. Hindriks, Jean & Myles, Gareth D., 2013. "Intermediate Public Economics," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262018691, January.
    5. Madden, David, 1996. "Marginal Tax Reform and the Specification of Consumer Demand Systems," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 556-567, October.
    6. Nigar Hashimzade & Gareth D. Myles, 2007. "Structure of the optimal income tax in the quasi-linear model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(1), pages 5-33.
    7. Tuomala, Matti, 1985. " Simplified Formulae for Optimal Linear Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(4), pages 668-672.
    8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    9. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-261, March.
    10. Myles, Gareth D., 2000. "On the optimal marginal rate of income tax," Economics Letters, Elsevier, vol. 66(1), pages 113-119, January.
    11. 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.
    12. Chris Heady, 1993. "Optimal taxation as a guide to tax policy: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(1), pages 15-41, February.
    13. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    14. 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.
    15. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-178, Winter.
    16. John Creedy, 2000. "Labour supply, welfare and the earnings distribution," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 4(3), pages 134-151, September.
    17. Creedy, John, 2001. "Tax Modelling," The Economic Record, The Economic Society of Australia, vol. 77(237), pages 189-202, June.
    18. Bruce Bradbury, 2004. "Targeting social assistance," Fiscal Studies, Institute for Fiscal Studies, vol. 25(3), pages 305-324, September.
    19. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
    20. John Creedy, 2001. "Indirect tax reform and the role of exemptions," Fiscal Studies, Institute for Fiscal Studies, vol. 22(4), pages 457-486., December.
    21. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
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    Cited by:

    1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Complementarity in Models of Public Finance and Endogenous Growth," Working Paper Series 3136, Victoria University of Wellington, Chair in Public Finance.
    2. Iwo Augustyński, 2016. "Skutki podniesienia kwoty wolnej od podatku od dochodów osobistych," Gospodarka Narodowa, Warsaw School of Economics, issue 1, pages 55-71.

    More about this item

    Keywords

    Personal income Tax Structure;

    JEL classification:

    • B3 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals
    • B30 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - General
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • D3 - Microeconomics - - Distribution
    • D30 - Microeconomics - - Distribution - - - General
    • D39 - Microeconomics - - Distribution - - - Other
    • D6 - Microeconomics - - Welfare Economics
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D69 - Microeconomics - - Welfare Economics - - - Other
    • P42 - Economic Systems - - Other Economic Systems - - - Productive Enterprises; Factor and Product Markets; Prices
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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