Changing the tax mix

Abstract

A tax mix change, including a component of the Australian tax reforms, involves a net increase in taxation of consumption and a net decrease in income taxation. If the tax mix change is approximately aggregate revenue neutral and retains current vertical equity, the new income tax rate schedule must be more progressive than the current schedule. The Australian proposal involves a revenue shortfall and some erosion of vertical progressivity. For the large proportion of households who save very little, the tax mix change has negligible effects on incentives and efficiency, and on total tax paid. For those with significant savings, or dissavings, the tax mix change favours saving over consumpti..