Apps, Patricia --- "Tax Reform, Ideology and Gender" [1999] SydLawRw 17; (1999) 21(3) Sydney Law Review 437
[*] Professor in Public Economics in Law. The study was supported by an ARC Large Grant.
[1] See, eg, Symons E & Walker I, ‘Tax Reform Analysis: The Effects of a Proportional Tax System’, in Head JG & Krever RE (eds), Flattening the Tax Rate Scale: Alternative Scenarios and Methodologies (1990) at 237–249; Feldstein M & Feenberg D, ‘The Taxation of Two- Earner Couples’ in Feldstein M & Poterba M (eds), Empirical Foundations of Household Taxation (1996) Ch2 at 39–73; Apps PF & Rees R ‘On the Taxation of Trade Within and Between Households’ (1999) 73 Journal of Public Economics at 241–263.
[2] Examples of the latter include the exploitation of family trusts, negative gearing and the proscribed payment system. For an excellent article on the need for reform in the area of family trusts, see Quiggin J, ‘A Relationship Taken on Trust’ The Australian Financial Review, (16 April 1997) at 20; and for an estimate of the loss of tax revenue from PAYE taxpayers switching to the proscribed payment system, see Buchanan J & Allan C, ‘The Growth of Contractors in the Construction Industry: Implications for Tax Reform’ in Buchanan J (ed), Taxation and the Labour Market, Working Paper 55, Australian Centre for Industrial Relations Research and Training, (University of Sydney, 1998) at 13–44.
[3] This focus is also surprising in the light of OECD estimates indicating that Australia has a directindirect tax mix which is close to the average of member countries. The comparison is based on total revenue from direct taxes, computed as the sum of collections from personal income taxation and social security, as well as taxes on profits. Australia is also recorded as one of the lowest taxed OECD countries. See OECD, Revenue Statistics of OECD Member Countries, 1965-1994 (Paris: OECD, 1996).
[4] Commonwealth of Australia, Tax Reform: Not a New Tax, A New Tax Plan, The Howard Government’s Plan for a New Tax System, circulated by the Treasurer, Peter Costello (Canberra: AGPS, 1998).
[5] The qualification ‘in its present form’ is an important one. Recent proposals for an Earned Income Tax Credit (EITC) program by a group of economists, referred to in the media as the ‘Five Economists’, indicate that some policy analysts are willing to see an expansion of the welfare state for the purpose of supporting labour market reforms expected to generate a new class of ‘working poor’. see, eg, Garnaut R, ‘Five Push for More Reforms in Jobs Strategy’ Australian Financial Review, (19 February, 1999). For a critical assessment, see Apps PF, ‘Economic Impact of a Family Tax Credit Program’, paper prepared for the Australia Centre Conference ‘Reform of Tax and Tax-Transfers in Germany and Australia’, ATAX, University of New South Wales, 1–3 September 1999.
[6] Other strategies include the introduction of mandatory occupational superannuation for the purpose of reducing reliance on age pension payments, and the increasing privatisation of segments of the public health care system.
[7] The classification is taken from Boskin MJ ‘Factor Supply and the Relationships among the Choice of Tax Base, Tax Rates, and the Unit of Account in the Design of an Optimal Tax System’ in Aaron HJ & Boskin MJ (eds), The Economics of Taxation (1980) at 147–157. The article defines joint taxation as a system under which the second earner in a dual income family faces a higher effective marginal tax rate than a single individual with the same income. Systems of partial joint taxation are those under which this condition applies to a limited range of the second earner’s income.
[8] The same direction of reform is implied by the EITC program of the Five Economists and by the Family Tax Credit program of the ALP as outlined at the time of the last election. These programs provide tax credits which are phased-in and subsequently withdrawn on the basis of joint earnings and therefore raise effective marginal tax rates for many second earners on relatively low pay. It can be shown that unless a Family Tax Credit program is financed by raising marginal rates for high income earners, there is a shift in the overall tax burden towards less well-off dual income families consistent with joint taxation (see Apps, above n5).
[9] See, eg, Brooks N, ‘Sales Tax Reform and Tax Mix Change: A Canadian Perspective’ in Head JG (ed), Fightback!: An Economic Assessment (1993) Ch11 at 243–307; Savage EJ, ‘Impact Analysis of the Fightback! Tax Reforms’ in Head JG (ed), Fightback!: An Economic Assessment (1993) Ch13 at 351–382; and Apps PF, ‘Effects of a Tax-Mix Change (1997) 13 Australian Tax Forum at 401–427. These studies examine predecessors to the Howard tax plan, including the reform proposed by the Liberal and National Parties, Fightback! (Canberra: AGPS, 1991).
[10] The gains reported in the Howard tax plan document are based on a non-revenue neutral reform, as well as on CPI assumptions which lead to an underestimate of losses for lower income groups from the GST and of gains for higher income groups. Simulations show that, under a revenue neutral reform, the lower gains reported for dual income families on relatively low rates of pay translate into significant losses.
[11] The proposed cuts in marginal tax rates on bands of individual taxable incomes are as follows: $6,000 – $20,000: -3% $20,000 – $38,000: -4% $38,000 – $50,000: -3% $50,000 – $75,000: -7 %
[12] For a formulation of the general framework, see Apps and Rees, above n1. The paper provides formal proofs for the propositions concerning outcomes discussed later in the paper.
[13] Full income is defined as the income that could be earned by working total time available.
[14] The ethics of the sharing rule enter formally through the welfare weights in the household welfare function. In Apps PF and Rees R, ‘Collective Labor Supply and Household Production’ (1997) 105 Journal of Political Economy at 178-190, we show that the parameters of the sharing rule cannot be identified using information on market variables alone. Data on domestic production and consumption variables are also required.
[15] The opportunity cost of time allocated to leisure is treated as an expenditure from full income.
[16] This allows us, at least for the moment, to ignore the complex set of issues associated with lifecycle investment and consumption decisions and with capital market failure which gives rise the economic dependency of children.
[17] A lump sum tax is defined as one that does not alter relative prices and therefore does not cause an efficiency loss due to substitution effects. This implies that the household, unlike the government, has full information on individual endowments and can achieve a ‘first best’ solution to the implicit intra-household tax problem. In general, information asymmetries rule out lump sum taxes as a policy instrument for government. The government is limited to taxing indicators of endowments (or ability to pay) such as observed income.
[18] A model based on similar assumptions has appeared relatively recently in leading international economics journals: see, eg, Chiappori PA, ‘Collective Labor Supply’ (1992) 100 Journal of Political Economy at 437–467. While recognising the multi-person nature of the household, the model assumes that non-market time is pure leisure, and so consumption is limited to that of market goods alone. In a traditional household in which the wife has no external income, this implies that she makes no contribution to the welfare of other family members and that her consumption of market goods is financed by a lump sum transfer from her husband. For a critical assessment of the model, see Apps PF & Rees R, ‘Labour Supply, Household Production and Intra-Family Welfare Distribution’ (1996) 60 Journal of Public Economics at 199–219.
[19] Traditional households are selected as those in which the spouse reports working less than 10 hours pw and non-traditional households, as those in which the spouse works 10 or more hours pw. The analysis is based on the 1989 HES rather than the more recent 1993 file because the latter omits hours of work and therefore does not permit the computation of individual wage rates from the data on earnings. Wage rates are required for computing potential incomes used later in the paper.
[20] In other words, we adopt the usual assumption that leisure is a ‘normal’ good.
[21] This is because the model attributes variation in domestic/market work choices across households with similar demographic characteristics, wage rates and non-labour incomes, to differences in domestic human capital and not to work-leisure preference heterogeneity. The available data on time allocations to pure leisure and work (market and domestic) suggest that the two household types do tend to have similar work-leisure preferences. See Apps and Rees, above n1.
[22] The assumption is unlikely to hold in the case of the few female second earners on high pay in protected labour submarkets, such as the CEO submarket.
[23] Potential income is computed using predicted wage rates for non-participants, corrected for selectivity bias and including an error term drawn randomly from the regression residuals of the wage equation.
[24] This assumes similar domestic productivities. If the traditional household is marginally more (less) productive in domestic work than the non-traditional household, the former should pay a correspondingly higher (lower) tax than the latter. For a formal proof , see Apps and Rees, above n1.
[25] See Apps and Rees, above n18.
[26] The reason for this is that behavioural changes inducing efficiency losses are those which involve substitution effects in response to relative price changes. Since the marginal rate of tax reduces the net wage for an additional hour of work, a higher EMTR implies a higher price for market consumption relative to that for non-market time, and this may induce substitution of the latter for the former. The size of the substitution effect, and therefore the efficiency loss or excess burden, can only be determined on the basis of empirical evidence.
[27] For a survey, see Killingsworth M & Heckman JJ, ‘Female Labor Supply: A Survey’ in Ashenfelter O & Layard R (eds), Handbook of Labor Economics (1991) Ch 2 at 103–204. For estimates based on Australian micro data, see Apps and Rees, above n18.
[28] An elasticity is defined, in the case of labour supply, as the ratio of the proportional change in hours of work to the proportional change in the net wage (or income), and is typically evaluated at data means.
[29] The Ramsey pricing rule refers to a longstanding result in optimal tax theory. The rule states that if one good cannot be taxed (such as leisure), the rates on those goods which can be taxed should, in general, vary inversely with the size of substitution effects. Ignoring income effects and cross elasticities, this implies that, for efficiency, tax rates should vary inversely with the size of labour supply and demand elasticities.
[30] Boskin MJ & Sheshinski E, ‘Optimal Tax Treatment of the Family: Married Couples’ (1983) 20 Journal of Public Economics 281–297.
[31] Feldstein& Feenberg, above n1.
[32] For a study which claims to obtain a conflicting result see Piggott J & Whalley J, ‘The Tax Unit and Household Production’ (1997) 104 Journal of Political Economy at 398–418. For a critical comment see Apps PF & Rees R ‘Individual vs Joint Taxation in Models with Household Production’ (1999) 107 Journal of Political Economy at 393–403.
[33] For a formal proof, see Apps and Rees, above n1.
[34] Heckman JJ, ‘What Has Been Learned about Labor Supply in the Past Twenty Years?’ (1993) 83 American Economic Review (papers and proceedings) at 116–121.
[35] An example is Hausman JA, ‘Stochastic Problems in the Simulation of Labor Supply’ in Feldstein M (ed), Behavioural Simulation Methods in Tax Policy Analysis (1983) Ch 2 at 47–82.
[36] For a formal analysis, see Apps PF & Rees R, ‘Household Saving, Time Allocation and Taxation’ (1999) (mimeo).
[37] In the standard life cycle model agents are assumed, in addition to having intertemporally additive utility functions, to have within period utility functions which are additively separable in consumption and leisure, where the latter includes domestic production.
[38] Examples include Blundell RW, Browning M & Meghir C, ‘Consumer Demand and the Life- Cycle Allocation of Household Expenditure’ (1994) 61 Review of Economic Studies 57–80. For a survey of the literature, see Browning M & Lusardi A, ‘Household Saving: Micro Theories and Micro Facts’ (1996) 34 Journal of Economic Literature 1797–1855.
[39] Browning M & Meghir C, ‘The Effects of Male and Female labor Supply on Commodity Demands’ (1991) 59 Econometrica at 925–51.
[40] Blundell, Browning & Meghir, above n38.
[41] See Apps and Rees, above n36.