PFM Articles 
Tax Policy Design and the Role of a Tax-Free Threshold
JOHN CREEDY, NICOLAS HÉRAULT and GUYONNE KALB
PFM, Vol. 11 No. 4,
(2011)
This paper examines the role of the tax-free threshold in a tax and transfer system consisting of a range of taxes and income support payments. The simultaneous payment of tax and receipt of income support, seen by some commentators as a problem, is examined. The analysis shows that with an income support system, a tax-free range is not required to achieve redistribution. With the aim of improving labor supply incentives while maintaining approximate revenue and distribution neutrality, a policy change involving the elimination of the tax-free threshold in Australia is examined using a behavioral microsimulation model which ac-counts to a large extent for population heterogeneity. The results demonstrate that the tax-free threshold can be eliminated under these conditions, but labor supply incentives cannot simultaneously be improved. This means that the status quo could be more or less maintained while eliminating the tax-free threshold.
Subscribers: Login to read this article
Guests: Subscribe to PFM, or purchase individual article access for $10.
The article is not available for automatic download. We will email the article to you as a PDF file upon receiving your payment, typically within 24 hours.
