Income Taxation

Question 1

Australian government tax-to-gdp ratio compared to oecd average

Answer 1

28.5% in Aus compared to oecd average of 34%

Question 2

personal income taxation in australia

Answer 2

assessed on annual individual income

sum of wages, self-employment income, capital income, capital gains, fringe benefits

Question 3

deductions on personal income tax

Answer 3

charitable giving, work related expenses, rental losses

Question 4

main exclusions from personal income tax

Answer 4

capital gains on family home, imputed rent of homeowners, undistributed corporate profits, unrealised capital gains

Question 5

tax rates

Answer 5

the ratio of tax collected to the tax base

Question 6

average tax rate

Answer 6

ATR = total tax paid/value of tax base

Question 7

marginal tax rate

Answer 7

MTR= ∆tax paid/∆value of tax base

Question 8

proportional tax

Answer 8

average tax rate is constant as income increases

Question 9

progressive tax

Answer 9

average tax rate rises with income

Question 10

regressive tax

Answer 10

average tax rate falls with income

Question 11

single bracket tax function

Answer 11

T(z) = A + tz

Question 12

issues with simple model

Answer 12

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

Question 13

equity-efficiency trade-off

Answer 13

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

Question 14

optimal linear tax rate

Answer 14

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

Question 15

optimal linear income tax formula

Answer 15

tax rate = (1-gbar)/(1-gbar+e)

elasticity e (efficiency)
gbar (equity)

Question 16

formula and equity-efficiency trade off

Answer 16

gbar is low and t close to revenue maximising rate when
inequality is high
marginal utility decreases fast with income

Question 17

optimal top income tax rate

Answer 17

(1/1+ae) with a=(z/z-z)

decreases with e
decrease with a
a≈2

Question 18

tax avoidance

Answer 18

legal means to reduce tax liability

Question 19

tax evasion

Answer 19

illegal under-reporting of income

Question 20

why does labour supply vs tax avoidance/evasion distinction matter

Answer 20

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

Question 21

high effective marginal tax rates

Answer 21

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

Question 22

optimal transfers: participation responses

Answer 22

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

Question 23

optimal profile of transfers: summary

Answer 23

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