Optimal Marginal Income Tax Reforms: A Microsimulation Analysis

John Creedy and Nicolas Hérault

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: Extensive research has shown that few robust results regarding the optimal tax structure are available. Moreover, the stylised models used in optimal tax analyses are not appropriate for practical policy advice. This paper proposes a method of examining optimal marginal income tax reforms using behavioural microsimulation models in which the full extent of population heterogeneity is represented along with all the details of highly complex tax and transfer systems. The approach is illustrated using the Australian microsimulation model MITTS. The results show that the marginal welfare changes for the Australian income tax structure are not symmetric with respect to increases and decreases in tax rates, largely because of the asymmetry in tax revenue changes arising from differential labour supply effects in different ranges of the income distribution. In addition, the extent of inequality aversion was found to play a much larger role in the determination of the optimal direction of rate changes than the form of the welfare metric or the specification of adult equivalence scales.

Pages: 28 pages
Date: 2009-08
New Economics Papers: this item is included in nep-acc, nep-cmp and nep-pub
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Citations: View citations in EconPapers (1)

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Working Paper: Optimal Marginal Income Tax Reforms: A Microsimulation Analysis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2009n23

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