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4.2 Welfare cost for subgroups

Information about the welfare changes and marginal welfare costs of the tax rate increases for a range of income and demographic groups is given in Table 5. Households in each demographic group are divided into quintiles by disposable income. The equivalent variations are arithmetic means (again weighted using HES sample weights) within each group. The MWC values are aggregates. It can be seen that, for some of the single women quintile groups and for most of the single parent quintile groups, the aggregate net tax revenue change is negative. However, aggregate revenue for each the demographic groups as a whole increases, as seen from the summary in Table 2. The majority of individuals in the single parent group thus appear to be on the ‘wrong side' of their Laffer curves: further tax rate increases impose welfare and revenue losses. For the lowest quintile of single parents, the marginal welfare cost is very high, at 6.32, despite the average equivalent variation being quite small, again reflecting the small total net revenue increase within the group.

The lowest marginal welfare costs are for single males. Except for the lowest quintile - for which hours worked are on average very low - the MWC varies from 4 to 8 cents per extra dollar of aggregate revenue. Of course, many of those in the lowest quintile work zero hours in the labour market. MWC values for couples are relatively high, being around 20 cents per dollar of net revenue, except for the top quintile in each category.

Instead of decomposing by quintile, Table 6 gives corresponding results to those of Table 5, where groups are divided into tax brackets. As Taxwell-B uses only disposable incomes, individuals are allocated to the tax brackets according to those net incomes, rather than taxable incomes. Hence, it should be recognised that some individuals assigned to a bracket are not actually facing the relevant marginal rate, but may face a higher rate. Except for single men, the highest marginal welfare costs are found in the lowest two tax brackets, particularly in the large second bracket between $14,000 and $48,000.

A decomposition by age is shown in Table 7. In this case couples with and without children are classified by both the age of the male and the female partner in turn. However, it is clear that the differences are negligible, reflecting the high correlation between the ages of partners. When single women are classified by age, aggregate net revenue in each broad group increases, although clearly the MWC values are high. Here, the higher MWCs are found for younger couples with children and older couples without children.

Table 5 - Welfare measure by disposable income and demographic groupa
Demographic group by income quintiles Age of
youngest child
Hourly wage rateb
M     F
Hours work/weekb
M.  F
Equivalent
variation (EV)
Marginal welfare
cost (MWC)

Couples with children

Quintile 1 6 14.96, 18.82 10, 6 553.59 0.17
Quintile 2 5 17.06, 18.87 34, 10 1907.23 0.17
Quintile 3 6 24.22, 20.51 43, 14 3392.66 0.23
Quintile 4 7 31.20, 37.86 46, 28 5330.80 0.23
Quintile 5 9 53.42, 33.71 46, 32 9344.14 0.10

Couples without children

Quintile 1   17.0, 18.94 2, 5 279.79 0.51
Quintile 2   13.90, 15.94 29, 15 1555.52 0.20
Quintile 3   17.92, 17.70 36, 20 2514.67 0.19
Quintile 4   21.47, 18.82 43, 31 3823.01 0.18
Quintile 5   35.10, 27.79 44, 35 6710.05 0.09

Single men

Quintile 1   18.56 1 50.23 0.00
Quintile 2   16.52 17 618.31 0.05
Quintile 3   14.88 39 1439.12 0.04
Quintile 4   19.14 42 2073.64 0.05
Quintile 5   35.91 44 4187.65 0.08

Single women

Quintile 1   12.70 3 101.36 0.68
Quintile 2   14.19 22 776.25 -
Quintile 3   15.71 35 1317.24 -
Quintile 4   19.26 42 2034.81 1.56
Quintile 5   34.26 43 3905.71 0.08

Single parents

Quintile 1 5 11.21 0 12.37 6.32
Quintile 2 6 12.25 4 146.63 -
Quintile 3 9 18.15 29 1331.46 -
Quintile 4 10 25.28 40 2553.99 -
Quintile 5 12 46.35 32 5399.25 -

Notes: a) Post-reform values and welfare changes are expected values b) The wage rates and hours worked for couples are male and female respectively.

Table 6 - Welfare measure by tax bracket and demographic groupa
Demographic group by income quintiles Age of
youngest child
Hourly wage rateb
M     F
Hours work/weekb M    F Equivalent
variation (EV)
Marginal welfare
cost (MWC)

Couples with children

0-14,000 5 14.63, 19.58 10, 3 477.47 0.17
14,001-48,000 7 25.85, 26.17 42, 19 3902.19 0.22
48,001-70,000 9 49.00, 32.83 45, 32 8483.24 0.09
>70,000 10 90.74, 47.04 50, 33 15997.14 0.06

Couples without children

0-14,000   16.72, 18.48 1, 7 204.30 0.99
14,001-48,000   20.58, 18.78 40, 27 3417.88 0.16
48,001-70,000   33.11, 27.50 44, 36 6354.77 0.10
>70,000   57.22, 38.03 45, 34 10999.63 0.07

Single men

0-14,000   18.24 1 74.71 0.00
14,001-48,000   17.76 39 1762.70 0.05
48,001-70,000   31.69 44 3654.54 0.07
>70,000   66.64 44 7797.16 0.11

Single women

0-14,000   12.39 4 137.97 0.71
14,001-48,000   17.89 37 1689.20 2.25
48,001-70,000   34.76 43 3705.82 0.09
>70,000   41.38 47 5429.42 0.02

Single parents

0-14,000 5 11.28 0 15.54 6.51
14,001-48,000 8 16.75 19 1000.06 -
48,001-70,000 12 48.64 28 5773.32 -
>70,000 Na Na na na na

Notes: a) Post-reform values and welfare changes are expected values b) The wage rates and hours worked for couples are male and female respectively.

Table 7 - Welfare measure by demographic group and agea
Demographic group by age Age of
youngest child
Hourly wage rateb
M     F
Hours worker/weekb
M    F
Equivalent
variation (EV)
Marginal welfare
cost (MWC)

Couples with children: classified by age of male

20-35 2 23.40, 21.39 41, 16 3460.92 0.30
36-50 8 30.45, 30.07 41, 20 4680.39 0.15
51-64 12 30.93, 22.80 40, 24 4921.08 0.19

Couples with children: classified by age of female

20-35 2 24.62, 21.37 41, 16 3555.85 0.28
36-50 9 30.83, 30.91 41, 22 4855.67 0.15
51-64 13 31.77, 21.09 42, 20 4821.53 0.11

Couples without children: classified by age of male

20-35   22.58, 20.61 39, 32 4119.79 0.07
36-50   29.62, 24.22 44, 32 5456.03 0.09
51-64   27.64, 23.17 39, 26 4661.50 0.17

Couples without children: classified by age of female

20-35   23.78, 20.97 39, 32 4243.99 0.06
36-50   30.10, 25.75 43, 32 5710.71 0.08
51-64   27.27, 22.40 39, 26 4522.18 0.19

Single men

20-35   19.84 34 1776.95 0.04
36-50   27.32 36 2630.68 0.07
51-64   26.16 34 2564.14 0.12

Single women

20-35   18.79 34 1758.82 0.81
36-50   23.56 38 2434.86 0.55
51-64   22.87 30 1985.60 0.90

Single parents

20-35 3 13.59 7 366.04 -
36-50 9 17.35 17 984.26 -c
51-64 15 18.17 20 2071.57 1.36

Notes: (a) Post-reform values and welfare changes are expected values. (b) The wage rates and hours worked for couples are male and female, respectively. (c) In this case the revenue change is positive but very small and, being close to the singularity, produces a meaningless MWC value.

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