Why an earned income tax credit program is a mistake for Australia

Abstract

This paper analyses the implications for labour supply, saving and income distribution, of a proposed policy program involving the introduction of an Earned Income Tax Credit (EITC) program. The paper evaluates the program as a step towards a simple negative income tax with a flat rate on income below the current top rate. The study derives first the implications for the marginal and average tax rates on primary and secondary earners in the Australian tax system, and then shows that the policy is essentially paid for by two-earner households at around the median wage level. Drawing on recent empirical work, we show that the result of this is likely to be a fall in labour supply and saving. Thus there is reason to be critical of the impact of the policy both on economic growth and on equity of the income distribution.