Essays in Public Finance

Abstract

This thesis presents three papers in the field of empirical public finance. The first two papers are related, and are based on the concept of the Inequality Deflator, while the third paper is an applied empirical paper looking at gender differences in tax filing behaviour.

The first paper estimates the inequality deflator for the Australian economy using a novel approach based on dynamic microsimulation. An Inequality Deflator is a measure of the cost of redistributing income through the existing tax and transfer system, and can also be interpreted as the revealed preference of society for income redistribution. Moreover, using the inequality deflator as distributional weights in a cost benefit framework is equivalent to modifying the standard Kaldor-Hicks welfare criterion to account for a distortionary tax system. Therefore, the Inequality Deflator represents a promising option to incorporate issues of equity into a cost benefit framework. This paper also applies the Inequality Deflator to the Australian economy to determine how much growth could have been achieved in the period 1993-2013 if the tax system were used to ensure that growth was spread evenly across the population.

The second paper extends the concept of the Inequality Deflator to an applied cost benefit situation in which benefits accrue to consumers or business owners. As business owners typically earn higher than average income, money transferred to a business will increase observed income inequality. Therefore, to the extent that a society values both equity and efficiency, a transfer to a business owner will be less valuable than if that transfer were received by an average individual. The Inequality Deflator is used to determine the value of a windfall gain to a business by asking how much would be received by each member of society if that gain were redistributed evenly across the population using the tax and transfer system. This paper also includes a discussion of how the different welfare weights for consumers and businesses estimated in this paper can be incorporated into sufficient statistics style public economics research.

The final paper uses Australian tax return data and techniques from the gender pay gap literature, including the Oaxaca-Blinder decomposition and the DiNardo-Fortin-Lemieux decomposition, to show that men claim more deductions on their tax return than women in similar economic circumstances. After controlling for observable characteristics such as income and occupation, men are found to claim around 12 per cent more deductions than women, which when taken at face value, increases the gender pay gap in Australia by around \$75 per year. The paper also finds an unexplained gender difference in 7 of 11 categories of deductions and amongst workers in 6 of 9 occupation classifications. Men and women earning different proportions of capital income and family tax planning are considered as potential explanations of the observed deduction gap. While both factors are found to influence the level of deductions claimed, they can only explain a small proportion of the observed difference in deductions between men and women.