Rationalising the interaction of tax and social security - part II

Abstract

Discussion Paper 423 described current problems in the interaction of the tax and social security systems, analysed the impact of the new tax system reforms, and proposed a number of reforms aimed at further addressing problems of high effective tax rates and associated work disincentives. <P> This paper takes the analysis a step further by considering more major structural reforms which could address such problems in a systematic manner, and allow the implementation of a designed set of effective tax rates (ETRs) for social security clients and taxpayers. <P> There are four main classes of reform options, namely: <u>Negative Income Tax (NIT) or Guaranteed Minimum Income (GMI)</u> <u>integration of tax and social security</u>, abolishing separate social security means tests and using a system of income tax surcharges and/or special rates to recoup benefits as income rises <u>full separation of the two systems</u>, using special tax scales or tax rebates to avoid tax cutting in until benefit entitlements are fully exhausted; and <u>full (integrated) coexistence</u>, such that the combined tax and social security tax rates approached a desired configuration.