Comparing Tax and Transfer Systems: How Might Incentive Effects Make a Difference?

12 Pages Posted: 15 May 2002

See all articles by John Creedy

John Creedy

University of Melbourne - Department of Economics

Peter Dawkins

Government of the Commonwealth of Australia - Economic and Financial Policy Division

Abstract

This paper compares a stylised version of a basic income flat tax system (BI/FT) with a means tested graduated tax system (MT/GT), with particular attention paid to potential labour supply effects of taxes. A highly simplified simulation model is developed in which individuals are homogeneous except for the wage they face, and there is a single means-tested benefit. In this model, moving towards universal benefits can raise labour force participation and such effects can outweigh the labour supply reductions of working taxpayers. The number of losers is found to be quite small relative to the number of winners. If a fully universal system is not adopted, a move towards it, by reducing the taper on means tested benefits at the expense of a higher tax rate, can lead to significant winners without losers. These findings do not appear to be sensitive to assumptions about the individuals' utility function defined over income and leisure.

Suggested Citation

Creedy, John and Dawkins, Peter, Comparing Tax and Transfer Systems: How Might Incentive Effects Make a Difference?. Available at SSRN: https://ssrn.com/abstract=312221

John Creedy (Contact Author)

University of Melbourne - Department of Economics ( email )

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Australia
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Peter Dawkins

Government of the Commonwealth of Australia - Economic and Financial Policy Division ( email )

Langton Crescent
Melbourne, 2600
Australia

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