The Cost of Income Redistribution in Australia

Abstract

This paper analyses the effect of raising effective marginal tax rates on the income of the representative household in each gross income decile in Australia by one percentage point, and distributing the proceeds of the tax increase either in the form of an equal grant, or as an equal payment to members of households in the lower half of the income distribution. The effectiveness of the program in redistributing income is measured as the ratio of total gains in disposable income to households in target deciles to losses in non‐target groups, or as the proportional reduction in the poverty gap. The cost is measured as the ratio of the sum of the income‐equivalent of changes in the welfare of non‐target groups to those of target groups, or as the ratio of income‐equivalent losses to gains.