Incentive and Distributional Effects of a Tax Mix Change: Some Simple Analytics

Melbourne Institute Working Paper No. 16/98

Date: July 1998


John Freebairn


Simple models are used to assess changes in effective average and marginal tax rates on income from work and capital and on income consumed and spent caused by a shift from taxation of income to taxation of consumption. The new income tax rate schedule becomes more progressive than currently. For low income earners with negligible savings, the same aggregate tax burden is paid, but with less lost in income tax and more in consumption tax. For middle and high income earners, on average the aggregate tax burden changes little, but those with larger savings win and those with low savings lose. Also, the lower tax burden on saving and capital income is matched by a higher tax burden on labour income.

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