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The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?

This paper addresses an important policy question: who gets the largest utility gain from income and does the tax system adequately reflect this? We address this question by using Australian panel data and taking life satisfaction as a proxy for utility, allowing us to identify the marginal utility of additional income for different groups of individuals. We find that optimal transfers consist of transfers from the old to the middle aged, and from the married to the unmarried. This optimal utilitarian welfare policy is then contrasted with information on who actually receives transfers and who pays for them in Australia, where we find that taxes are too high for some groups, like the young, and that they are too low for other groups, like the elderly. We believe that the methodology developed in this paper could be fruitfully applied to the issue of optimal taxation in other countries.

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File URL: http://www.uq.edu.au/economics/abstract/450.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 450.

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Date of creation: 31 Jan 2012
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Handle: RePEc:qld:uq2004:450
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Web page: http://www.uq.edu.au/economics/
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  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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  9. van Praag, Bernard M. S. & Baarsma, Barbara E., 2004. "Using Happiness Surveys to Value Intangibles: The Case of Airport Noise," IZA Discussion Papers 1096, Institute for the Study of Labor (IZA).
  10. Nick Carroll & Paul Frijters & Michael Shields, 2009. "Quantifying the costs of drought: new evidence from life satisfaction data," Journal of Population Economics, Springer, vol. 22(2), pages 445-461, April.
  11. Bruno Frey & Simon Luechinger & Alois Stutzer, 2009. "The life satisfaction approach to valuing public goods: The case of terrorism," Public Choice, Springer, vol. 138(3), pages 317-345, March.
  12. Frijters, Paul & Gregory, Bob, 2006. "From Golden Age to Golden Age: Australia's "Great Leap Forward"?," IZA Discussion Papers 2068, Institute for the Study of Labor (IZA).
  13. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  14. Luechinger, Simon & Meier, Stephan & Stutzer, Alois, 2006. "Bureaucratic Rents and Life Satisfaction," IZA Discussion Papers 1964, Institute for the Study of Labor (IZA).
  15. Bruno S. Frey & Alois Stutzer, 2001. "What Can Economists Learn from Happiness Research?," CESifo Working Paper Series 503, CESifo Group Munich.
  16. Ada Ferrer-i-Carbonell & Bernard M. S. van Praag, 2001. "The Subjective Costs of Health Losses Due to Chronic Diseases: An Alternative Model for Monetary Appraisal," Discussion Papers of DIW Berlin 262, DIW Berlin, German Institute for Economic Research.
  17. Plug, Erik J. S. & van Praag, Bernard M. S. & Hartog, Joop, 1999. "If we knew ability, how would we tax individuals?," Journal of Public Economics, Elsevier, vol. 72(2), pages 183-211, May.
  18. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
  19. Anton Hallam & Ernst Juerg Weber, 2008. "Labour Taxes and Work Hours in Australia," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 11(2), pages 117-128, June.
  20. Rafael Di Tella & Robert MacCulloch, 2006. "Some Uses of Happiness Data in Economics," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 25-46, Winter.
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  22. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series 071a, School of Economics and Finance, Queensland University of Technology.
  23. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
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