Flattening the Effective Marginal Tax Rate Structure in Australia: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator

This article uses the Melbourne Institute Tax and Transfer Simulator to examine the effects of a reduction in the means‐tested benefit taper, or withdrawal, rates in Australia to 30 per cent. That is, all taper rates of 50 per cent and 70 per cent in the March 1998 benefit system are reduced to 30 per cent, while leaving all basic benefit levels unchanged. This change is therefore expected to ‘flatten’ the tax structure by reducing the high marginal tax rates applying to those with relatively low incomes and increasing the marginal tax rates of medium incomes. Simulations in which all individuals are assumed to remain at their pre‐reform labour supply levels are compared with behavioural simulations in which the majority of individuals are free to adjust the number of hours worked. The results reflect only the supply side of the labour market. The database used is the 1997‐98 Survey of Income and Housing Costs, so that weekly incomes are based on the financial year 1997‐98. The comparison shows that, for sole parents, accounting for behavioural effects of the reform results in a lower estimated expenditure for government, whereas for couples, accounting for behavioural effects results in a higher estimated expenditure.