The Central Role of a Well-Designed Income Tax in 'The Modern Economy'

Abstract

Two of the most fundamental changes in the Australian economy since the middle of the 20th century have been the dramatic fall in fertility and the rise in female labour force participation. Over the same period, the progressivity of the income tax has declined significantly, despite rising inequality, and the individual as the tax unit has been replaced by a system of “quasi-joint” taxation for families, creating high effective tax rates for partnered mothers as second earners. In this article, we draw on household survey data to show that this direction of reform has been counterproductive, with strong negative effects on female labour supply and saving and, in turn, on productivity and the tax base. The analysis highlights the efficiency merits of a well-designed, individual-based income tax over consumption taxation in “the modern economy”.