Income Taxation Flashcards
Australian government tax-to-gdp ratio compared to oecd average
28.5% in Aus compared to oecd average of 34%
personal income taxation in australia
assessed on annual individual income
sum of wages, self-employment income, capital income, capital gains, fringe benefits
deductions on personal income tax
charitable giving, work related expenses, rental losses
main exclusions from personal income tax
capital gains on family home, imputed rent of homeowners, undistributed corporate profits, unrealised capital gains
tax rates
the ratio of tax collected to the tax base
average tax rate
ATR = total tax paid/value of tax base
marginal tax rate
MTR= ∆tax paid/∆value of tax base
proportional tax
average tax rate is constant as income increases
progressive tax
average tax rate rises with income
regressive tax
average tax rate falls with income
single bracket tax function
T(z) = A + tz
issues with simple model
no behavioural responses: 100% redistribution would destroy incentives to work and thus the assumption that z is exogenous is unrealistic
issue with utilitarianism: even absent behavioural responses, many people would object to 100% redistribution. perception of fairness impose bounds on redistribution govt can do
equity-efficiency trade-off
taxes can be used to raise revenue for transfer programs which can reduce inequality in disposable income
taxes and transfers reduce incentives to work
size of behavioural response limits the ability of government to redistribute with taxes/transfers
optimal linear tax rate
government chooses a tax rate to maximise utilitarian social welfare taking into account that earnings response zi responds to taxation and hence this affects the tax revenue per person that is redistributed back as a transfer to everybody
optimal linear income tax formula
tax rate = (1-gbar)/(1-gbar+e)
elasticity e (efficiency)
gbar (equity)
formula and equity-efficiency trade off
gbar is low and t close to revenue maximising rate when
inequality is high
marginal utility decreases fast with income
optimal top income tax rate
(1/1+ae) with a=(z/z-z)
decreases with e
decrease with a
a≈2
tax avoidance
legal means to reduce tax liability
tax evasion
illegal under-reporting of income
why does labour supply vs tax avoidance/evasion distinction matter
if people work less when tax rates increase, there is not much the government can do about it
if people avoid/evade more when tax rates increase, then the government can reduce tax avoidance/evason opportunities
high effective marginal tax rates
benefit of concentrating income support on those most in need
efficiency cost is low if high EMTRs affect work decision only along the intensive margin, because earnings at the bottom are already low
high EMTRs may push people out of work
optimal transfers: participation responses
participation labor supply responses are large at the bottom
participation depends on participation tax rate
in-work subsidies with T’(z)<0 are optimal when labor supply responses are concentrated along extensive margin and govt cares about low income workers
optimal profile of transfers: summary
Generous benefits with sharp tapering (high EMTRs) optimal if society views low and zero earners as most deserving and earnings responses are concentrated on the intensive margin
in work subsidies desirable if society wants to target support on those in work and labour supply responses are concentrated on the extensive margin
