Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia
ABSTRACT
This paper involves an examination of the labour supply effects of a stylised version of a "Basic Income Flat Tax' system (BI/FT) compared with a Means Tested Graduated Tax system (MT/GT). A highly simplified simulation model is developed in which individuals are homogeneous except for the wage they face, and there is a single means-tested benefit. It is concluded that there are reasons to believe that moving towards universality could increase labour force participation and that such effects could outweigh the labour supply reductions of taxpayers already in work. The number of losers is found to be quite small relative to the number of winners. Even if a fully universal system is not adopted, a move towards it by reducing the taper on means tested benefits at the expense of a higher tax rate, can lead to significant winners without losers. These findings do not appear to be very sensitive to assumptions about the individuals' utility function defined over income and leisure. This confirms that there are good reasons to be interested in reforms to the tax-transfer system that aim to reduce effective marginal tax rates.
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