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Tax Policy Design and The Role of a Tax-Free Threshold

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  • John Creedy: Nicolas Herault
  • Guyonne Kalb

Abstract

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.

Suggested Citation

  • John Creedy: Nicolas Herault & Guyonne Kalb, 2008. "Tax Policy Design and The Role of a Tax-Free Threshold," Department of Economics - Working Papers Series 1046, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:1046
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    References listed on IDEAS

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    1. John Creedy & Guyonne Kalb, 2005. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 697-734, December.
    2. Atkinson, A. B., 1996. "Public Economics in Action: The Basic Income/Flat Tax Proposal," OUP Catalogue, Oxford University Press, number 9780198292166.
    3. John Creedy & Alan S. Duncan & Mark Harris & Rosanna Scutella, 2002. "Microsimulation Modelling of Taxation and the Labour Market," Books, Edward Elgar Publishing, number 2796.
    4. John Creedy & Guyonne Kalb, 2006. "Labour Supply and Microsimulation," Books, Edward Elgar Publishing, number 4236.
    5. Creedy, J. & O'Brien, D.P. (ed.), 1984. "Economic Analysis in Historical Perspective," Elsevier Monographs, Elsevier, edition 1, number 9780408114301.
    6. John Creedy, 1996. "Fiscal Policy and Social Welfare," Books, Edward Elgar Publishing, number 797.
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    1. John Creedy & Jamas Enright & Norman Gemmell & Nick McNabb, 2010. "Income Redistribution and Direct Taxes and Transfers in New Zealand," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 43(1), pages 39-51, March.

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