Designing Personal Income Tax and Transfer Reforms: Alternative Modelling Approaches

Abstract

AbstractDecisions regarding personal income tax and transfer reforms are inevitably subject to value judgements. Hence, there is a crucial role for policy analysis in which the implications of clearly expressed values are considered. Tax models play a central role in such analyses. This paper reviews a number of tax models and illustrates their use in the context of the New Zealand income tax and transfer system. It is suggested that the appropriate economic models vary according to: the precise ways in which the policy question is formulated; the underlying behavioural responses to taxation expected across the taxpaying population; the precise definitions of key variables such as income inequality; and the specification of policy objectives such as redistribution, revenue‐raising or tax efficiency.