Tax Policy Design and the Role of A Tax-Free Threshold

Abstract

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 accounts to a large extent for population heterogeneity. The results..