The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?
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This paper addresses an important policy question: who gets the largest utility gain from income and does the tax system adequately reflect this? We address this question by using Australian panel data and taking life satisfaction as a proxy for utility, allowing us to identify the marginal utility of additional income for different groups of individuals. We find that optimal transfers consist of transfers from the old to the middle aged, and from the married to the unmarried. This optimal utilitarian welfare policy is then contrasted with information on who actually receives transfers and who pays for them in Australia, where we find that taxes are too high for some groups, like the young, and that they are too low for other groups, like the elderly. We believe that the methodology developed in this paper could be fruitfully applied to the issue of optimal taxation in other countries.
KeywordsOptimal taxation Life satisfaction Utility
This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (MIAESR). The findings and views reported in this paper, however, are those of the author and should not be attributed to either FaHCSIA or the MIAESR.
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