Topics in Tax and Child Benefit Design

Abstract

This thesis examines the interaction between means-tested child benefits and the progressive tax system in Australia, focusing on efficiency, welfare, and equity. It consists of three chapters.

Chapter 2 provides the empirical foundation by documenting income dynamics and the role of government transfers in insuring parents against earnings shocks. The findings also reveal that public transfer responses to primary earners' shocks correlate with weak labour supply responses from secondary earners, suggesting potential work disincentives.

Chapter 3 develops a dynamic general equilibrium overlapping-generations model with heterogeneous households, incorporating family structure, education, female human capital formation, uninsurable earnings shocks, child-related costs, and the exact structure of child benefit programs in Australia. The model is used to assess the current child benefit design and potential reforms. The results support universal child benefits for enhancing female labour supply, output, and overall welfare. However, they also underscore the importance of means-testing by demonstrating that while the universal scheme improves aggregate outcomes, it imposes a heavier tax burden that disproportionately harms single mothers, the intended beneficiaries.

Chapter 4 extends the analysis by examining the broader tax-benefit interplay. It argues that optimizing the tax system alone can undermine child benefit objectives and proposes an optimal joint policy design featuring a less progressive tax schedule and a universal lump-sum child benefit set at 30% of the average income per child. While this system improves overall and parental welfare by enhancing consumption allocative efficiency, particularly for vulnerable groups such as single mothers, it comes at the expense of non-parents, who face higher tax burdens, raising important equity considerations.

This thesis makes three key contributions: (i) From a policy-making perspective, it demonstrates that overall welfare (under the veil of ignorance) improves significantly when policies target vulnerable demographics, such as young single mothers. However, the distributional consequences for non-parent households must be carefully considered; (ii) In line with recent literature, it highlights the importance of modelling family structure in policy analysis, as different demographic groups face distinct economic constraints, including household size, earnings capacity, access to family insurance, and child-related costs; (iii) It underscores the critical role of policy interactions, particularly the trade-off between means-testing and tax distortions, in shaping welfare outcomes, providing a foundation for future research.

Lastly, the findings suggest multiple policy options to improve both overall and parental welfare. If both tax and child benefit policies can be adjusted flexibly, an optimal policy mix can be designed to maximize welfare. Otherwise, relaxing the phase-out rates of the Child Care Subsidy emerges as a well-rounded reform that effectively balances improvements in female labour supply, output, overall welfare, and equity. Show more