Balancing Efficiency and Equity in the Tax and Transfer System

Abstract

Tax-transfer systems in developed countries balance a range of competing objectives. The tax-transfer system appears quintessentially public – we raise taxes to fund government goods and services, to achieve redistribution and to address inequality, while we provide transfers in the welfare state to achieve poverty alleviation and to protect against a range of risks as a form of social insurance. However, the ‘public’ tax-transfer system is not separate from, but is instead interdependent with, the ‘private’ labour market and ‘private’ family or household economies, producing a hybrid public–private regime. In seeking to balance objectives of equity and efficiency in tax-transfer systems, governments are concerned to maximise policy effectiveness and efficiency while minimising adverse outcomes in relation to incentives to work or save or to form or dissolve families or households, and ensuring the long-term fiscal sustainability of the system. This chapter examines the hybrid Australian tax-transfer system in an international comparative perspective, identifying some distinctive design features and outcomes of Australian arrangements compared to other countries. It first examines who pays for and benefits from the tax-transfer system, focusing on the recent topical, but misguided question of who is a ‘net taxpayer’. Second, it inquires into the fundamental goal of a tax-transfer system with reference to the goal of improving individual wellbeing while balancing fiscal cost, equity and efficiency.