Redistributional Impact of Alternative Tax-Transfer Policies
This subsection reports the distributional impact of changes in a number of tax-transfer parameters. One issue of interest is, if a government wishes to maintain constant inequality, or achieve the maximum reduction in inequality for a given fiscal cost, which reforms best deliver those outcomes? Table 4 shows the Gini and Concentration indices of post-tax-and-transfer income under the 2006-07 system (using income per adult-equivalent person), for which GZ = 0.335; CZ = 0.332.[25]
Tax change scenario 1.1 in the table shows that an increase in the top MTR to 0.42 costs around -$360m (i.e. it raises revenue) and reduces CZ by 0.003. This is more than reversed by raising the top rate threshold from $60k to $100k (see 1.2). However, comparing (1.2) and (1.3) shows that if the top threshold is first raised to $100k (CZ = 0.335), raising the top MTR to 0.42 then achieves negligible redistribution (-0.001). Alternatives 2, 3 and 4 show the impact of raising the other tax rates (0.33 to 0.36 or 0.21 to 0.22) at similar fiscal revenue gain, and raising the lowest rate of 0.15, to 0.17 (at slightly greater revenue gain). It can be seen that all three have minimal effect on the two inequality indices. On the other hand, raising the main WfF rates by 20 per cent (with a fiscal cost of $680m) has a greater impact than raising the top MTR to 0.42.
| No. | Tax change scenario | GZ | CZ |
Fiscal cost, $m |
|---|---|---|---|---|
| Status Quo: GY = 0.390 | 0.335 | 0.332 | ||
| 1.1 | 39% rate to 42% | 0.332 | 0.329 | -356 |
| 1.2 | 39% rate to 42% & threshold: 60K to 100K | 0.336 | 0.334 | 239 |
| 1.3 | 39% threshold: 60K to 100K only | 0.338 | 0.335 | 397 |
| 2. | 33% rate to 36% | 0.333 | 0.331 | -351 |
| 3. | 21% rate to 22% | 0.335 | 0.332 | -367 |
| 4. | 15% rate to 17% | 0.336 | 0.333 | -432 |
| 5. | FTC+IWTC levels raised by 20% | 0.331 | 0.327 | 680 |
Notes
- [25]This analysis uses the simpler adult equivalence scale: a = 0.6, q = 0.7. Similar results are obtained using a simpler inequality measure that focuses on the ratio of average income for the top 80% of incomes to average income for the bottom 20%.
