Understanding Changes in Progressivity and Redistributive Effects: The Role of Tax-Transfer Policies and Labour Supply Decisions

Nicolas Hérault and Francisco Azpitarte ()
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Francisco Azpitarte: Brotherhood of St Laurence; and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, http://melbourneinstitute.com/staff/far/default.html

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

Abstract: In this paper we propose a framework to study changes in the redistributive consequences of income taxes and transfers. In contrast with previous approaches the new method allows decomposition of the change in the redistributive impact into four components: the immediate effect of changes in the tax-transfer system in the absence of labour supply responses; the effect of labour supply changes induced by changes in the tax-transfer system; the effect of all other labour supply changes; and a residual capturing the variation not explained by the previous factors. We illustrate the use of our decomposition method by analysing the changes in the redistributive impact of the tax and transfer system in Australia between 1999 and 2007. We find that labour supply changes, and in particular the increase in employment rates over the period, explain to a large extent the observed reduction in the redistributive effect of the tax-transfer system. A sizable part of these labour supply changes were found to be direct responses to tax-transfer reforms. Interestingly, we find that tax reforms were not responsible for the observed reduction in tax progressivity.

Keywords: Income; redistributive effect; labour supply; taxes and transfers (search for similar items in EconPapers)
JEL-codes: D31 H23 J22 (search for similar items in EconPapers)
Pages: 20pp
Date: 2013-10
New Economics Papers: this item is included in nep-lab, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2013n33

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