Essays in Empirical Tax Policy: Taxpayers' Responses to the Australian Personal Taxation System

Abstract

This thesis provides the first detailed examination of taxpayers' responses to and understanding of the Australian personal income tax system. Improving our understanding of the behavioural responses to the tax system is important for welfare analysis and tax and transfer system design. The thesis makes several important contributions to the empirical literature examining taxpayer response to personal taxation systems. First, we develop a new data asset, the Australian Taxation Office Longitudinal Information Files: Individuals (ALife: Individuals), a comprehensive tax administrative dataset for the Australian personal income tax system (Chapter 2). We also develop a static tax microsimulation model for use with ALife: Individuals, the Australian Tax Simulation (AusTaxSim) model, and highlight its usefulness in calculating average and effective marginal tax rates and undertaking policy costings and related distributional analysis (Chapter 3). Drawing on the ALife dataset, we examine taxpayer responses to kinks (Chapter 4) and notches (Chapter 5) in the Australian personal tax system. Unlike studies for other countries, we find sharp and significant bunching at all kink points in the Australian personal income tax system. Observed elasticities of taxable income range from effectively zero for wage and salary earners to around 0.23 for self employed taxpayers, although there is significant heterogeneity across subgroups of the population with notably higher elasticities for those with greater opportunity to shift income within the household. Analysing taxpayer behaviour around a notch created by Australia's higher education income contingent loan scheme, we find a large share of individuals face significant frictions and are unable to optimise their income despite the strong inventive to do so. Such optimisation frictions (or costs) likely explain the modest behavioural responses and low estimates of the observed elasticity of taxable income found in studies using kinks. The structural elasticity of taxable income, unattenuated by frictions, ranges from a lower bound of 0.05 for wage and salary earners and up to 0.638 for self-employed taxpayers. The analysis also highlights further evidence to suggest that taxpayer responsiveness is not only a function of marginal tax rates but also both the structure and the administration of the tax system.