Optimal Tax Design: Choice of Tax Base and Rate Structure

Abstract

This paper examines the distributional outcomes of the tax parameters of the Australian income tax system within the framework of modern tax theory. The analysis focuses first on the parameters of the Personal Income Tax and Low Income Tax Offset. The results show that Australia has moved towards an effective marginal tax rate scale on individual incomes that is less progressive and no longer strictly progressive, changes which have shifted the overall burden towards low and middle income earners. Turning to the impact of including Family Tax Benefit - Part A, the analysis identifies the resulting high effective marginal tax rates across low to average primary incomes and, in turn, on the income of the 2nd earner with the potential for a strongly negative effect on female labour supply, human capital and fertility. These outcomes are supported by the results of empirical studies reported in the paper.

Keywords: Inequality, Optimal taxation, Personal income, Childcare, Time allocation

JEL Classification: D63, H21, H24, J13,J22