The Effect of a Reduced Allowance and Pension Taper Rate: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator

Melbourne Institute Working Paper No. 25/02

Date: 2002

Author(s):

Guyonne Kalb
Hsein Kew

Abstract

This paper presents the results of two policy simulations for couples with and without children. The first policy involves a reduction of the highest withdrawal rate from 70 to 60 per cent. The second policy reduces all withdrawal rates of 70 and 50 per cent to 30 per cent. A comparison is made between the two policies to determine the magnitude of the impact on government expenditure and labour supply responses. Both policies have the effect of increasing the net income of those who are either partly relying on benefit payments or whose pre-reform income is just above the pre-reform cut-out points. Other people are unaffected, which means that overall government expenditure will increase. Behavioural simulations show that married men and women seem to be relatively unresponsive to the first policy. This implies that minor changes in the withdrawal rate do not seem to be effective. The second policy induces larger behavioural changes. The transition matrices suggest that married women are more responsive to a reduction in the taper rate than men. Overall, women are working less on average whereas men tend to work more on average. These results are similar to the effects found in the US and UK literature.