Melbourne Institute Research Insight: Have Tax–Transfer Policy Reforms Increased Inequality?

Have tax–transfer policy reforms increased inequality?, Melbourne Institute Research Insight No. 1/20

Authors: Nicolas Hérault, Guyonne Kalb & Francisco Azpitarte

Introduction

Australia has experienced 28 years of uninterrupted annual economic growth. Since reaching a peak of 11 per cent in 1993, the unemployment rate declined sharply and has been below 6 per cent for most of the period since mid-2003.

Despite these great economic achievements, research indicates that income inequality has increased since the mid-1990s and no substantial reduction in poverty has been achieved (ACOSS, 2016, 2018, Wilkins 2015, Hérault and Azpitarte 2015). During this period substantial fiscal reforms were implemented, so a legitimate question is whether, and how, these reforms added to or mitigated these inequality trends.

Fiscal policy, including tax and transfer policy, is the main tool used by governments for redistributing income. Evidence from several OECD countries suggests that tax–transfer systems have become less effective at redistributing income due to the regressive nature of fiscal reforms implemented up until the 2000s (OECD 2011), a finding that applies to Australia too (Hérault and Azpitarte 2015, 2016).

The difficulty in identifying the impacts of fiscal reform is that it occurs alongside many other changes which affect economies. Hérault and Azpitarte (2016) developed a modelling framework which allowed for the identification of the specific impacts of tax–transfer policy reforms on income inequality. This Research Insight applies this methodology to the most recent Australian Survey of Income and Housing (SIH) data from the Australian Bureau of Statistics. This approach is based on simulated tax and transfer payments assuming full take-up of benefits and is, therefore, not affected by changes in benefit mis-reporting in survey data or to changes in benefit take-up rates.

Download the paper