Essays on fiscal policy in Australia

This thesis comprises three papers that examine the role of income tax policy in Australia within the broader fiscal system. The first paper (Chapter 2) studies trends in the Australian personal income tax system's progressivity after the introduction of "A New Tax System (Goods and Services Tax) Act 1999". It measures tax progressivity based on tax liability distribution across the income distribution using the Suits index. The index shows that Australia experienced a cycle of increasing and decreasing progressivity from 2001-2016. Active tax policy with frequent adjustments to income brackets, marginal rates, and offset levels made the tax system more progressive before 2010, while inactive tax policy made it less progressive after 2010. This decline is due to the income tax code failing to adjust for income distribution changes. The paper finds that while indexing tax brackets to inflation can partially mitigate the decline in progressivity; it is not a full substitute for (annual) frequent discretionary adjustments to the tax code. The second paper (Chapter 3) builds on the empirical findings in Chapter 2 and asks a broader question on the optimal design of the income tax system in Australia. To do so, it builds a dynamic general equilibrium, overlapping generations (OLG) model with skill heterogeneity and uninsurable labor productivity risk, calibrated to match the key features of the Australian economy. The paper applies the model to search for the personal income tax system's optimal progressivity, relying on a utilitarian social welfare criterion. Results indicate that reducing the income tax system's progressivity reduces distortions on incentives to work and save, leading to improvements in aggregate efficiency and welfare. Under the welfare criterion, the optimal tax system is proportional with a tax rate of around 14 percent. The income tax system's optimal progressivity level is closely related to the design of a means-tested pension system. Interestingly, the optimal proportional tax code is robust to alternative means-tested age pension system designs. The third paper (Chapter 4) moves from the welfare implications of income tax design to examining the fiscal limits to which the government could use the income tax system to raise tax revenues. It quantifies the fiscal space (the amount of additional tax revenue that can be potentially generated) by changing the progressivity and average level of taxation (tax level) of the Australian income tax code. Using an OLG model that matches key aggregate and distributional statistics of the Australian economy, it examines the Laffer curves for income tax progressivity and tax level in Australia. The peak of the Laffer curve defines the fiscal limit. The paper finds that tax revenue increases when the tax code's curvature decreases (becomes less progressive). The income tax code's fiscal limit is with a flat income tax code at a tax rate of 95%. The associated fiscal space represents a 208% increase in income tax revenue. However, in general equilibrium, as the income tax rate increases, after-tax incomes decrease, leading to large reductions in consumption and, in turn, consumption tax revenue. As a result, the total tax revenue gain is significantly lower at 126%. The paper also highlights the advantage of Australia being a small open economy when it comes to the revenue maximizing potential of income tax. The adverse incentive effects on household savings due to rising tax rates are mitigated by foreign capital inflows, preventing aggregate capital stock decline. The paper contrasts the small open economy case with the closed economy case that results in a Laffer curve peak at 60% and a smaller fiscal space of 116%

Spatial variations in contributors to life satisfaction: an Australian case study

What people consider important, and how these factors contribute to their self-reported life satisfaction (LS), varies significantly across regions. Here, we analyse for the first time how LS varies across space and what factors best explain LS at different locations. Geographically weighted regressions (GWR) were used to analyse the relationship between LS and seventeen objective variables across Australia. We find that contributors to LS vary considerably but individuals living in relative proximity to each other share similar perspectives. Taking into account the spatially explicit heterogeneity of a population allows for the assessment of federal policies at local or regional levels, increasing the likelihood that their impacts will be consistent with the original intent. It also enables the perspectives of the diversity of cultures within a nation to be better understood

Subjective wellbeing at different spatial scales for individuals satisfied and dissatisfied with life

Indicators that attempt to gauge wellbeing have been created and used at multiple spatial scales around the world. The most commonly used indicators are at the national level to enable international comparisons. When analyzing subjective life satisfaction (LS), an aspect of wellbeing, at multiple spatial scales in Australia, variables (drawn from environmental, social, and economic domains) that are significantly correlated to LS at smaller scales become less significant at larger sub-national scales. The reverse is seen for other variables, which become more significant at larger scales. Regression analysis over multiple scales on three groups (1) all individuals within the sample, (2) individuals with self-reported LS as dissatisfied (LS ≤ 5), and (3) individuals self-reporting LS as satisfied (LS > 5), show that variables critical for LS differ between subgroups of the sample as well as by spatial scale. Wellbeing measures need to be created at multiple scales appropriate to the purpose of the indicator. Concurrently, policies need to address the factors that are important to wellbeing at those respective scales, segments, and values of the population

Islamic finance and economics from a new institutional approach

This thesis proposes a framework to explain and analyse Islamic financial and economic theories at par with conventional positive economic thought. Islamic Shariah law consists of stipulations on contracts that are fundamentally different from conventional finance. It requires going beyond an assessment of mere financial transactions towards a deeper analysis of the all types of contracts that can be entered into by all factors of production. Hence, this thesis examines conventional theories of production and distribution and proposes a narrative of distribution from a New Institutional Economic perspective that puts emphasis on institutional arrangements and contracts entered by various economic agents. It then explains the institutional environment by examining types of contracts that are allowed under Islamic Shariah in order to describe production and distribution in an economy that is governed by its rules. The main contributions of this thesis are in its re-examinations on distribution theory and Islamic financial theory. In regards to the theory of distribution it proposes a narrative that can be used to explain and analyse any economic system by examining the types of contracts that are allowed and those that are restricted. In regards to Islamic finance, it proposes a move away from the oversimplified explanation oflslamic finance as 'interest-free' and towards looking at its contractual restriction

Tax Progressivity in Australia: Facts, Measurements and Estimates

We study trends in progressivity of the Australian personal income tax system after the introduction of A New Tax System (Goods and Services Tax) Act 1999. We employ two methodological approaches: one based on tax liability progression and one based on tax liability distribution. The latter shows a cycle of lesser and greater tax progressivity in Australia between 2000 and 2018. We identify two main drivers of the tax progressivity cycle: lack of automatic indexation and mismatch between the income tax code and the evolution of market income distribution. Active tax policy with frequent adjustments to income brackets, marginal rates and offset levels drive the progressivity level before 2010. Meanwhile, inactive tax policy induces lower levels of tax progressivity after 2010 as the income tax code fails to track the changes in market income distribution. Indexation to inflation can partially mitigate the decline in progressivity; however, it is not a full substitute for a proper tax indexation system with (annual) frequent adjustments. Furthermore, we separate the contributions of taxes and transfers to overall progressivity of the tax and transfer system. We find the redistributive role of transfers is more pronounced

Islamic finance and economics from a new institutional approach

This thesis proposes a framework to explain and analyse Islamic financial and economic theories at par with conventional positive economic thought. Islamic Shariah law consists of stipulations on contracts that are fundamentally different from conventional finance. It requires going beyond an assessment of mere financial transactions towards a deeper analysis of the all types of contracts that can be entered into by all factors of production. Hence, this thesis examines conventional theories of production and distribution and proposes a narrative of distribution from a New Institutional Economic perspective that puts emphasis on institutional arrangements and contracts entered by various economic agents. It then explains the institutional environment by examining types of contracts that are allowed under Islamic Shariah in order to describe production and distribution in an economy that is governed by its rules. The main contributions of this thesis are in its re-examinations on distribution theory and Islamic financial theory. In regards to the theory of distribution it proposes a narrative that can be used to explain and analyse any economic system by examining the types of contracts that are allowed and those that are restricted. In regards to Islamic finance, it proposes a move away from the oversimplified explanation oflslamic finance as 'interest-free' and towards looking at its contractual restriction

Objective and Subjective Indicators of Life Satisfaction in Australia: How Well Do People Perceive What Supports a Good Life?

Wellbeing is the product of a complex set of factors, some of which are well perceived by individuals while others are not. Surveys based on answers to the question: ‘how satisfied are you with your life?’ have allowed increased understanding of the factors affecting perceived life satisfaction. We use the Household, Income and Labour Dynamics in Australia (HILDA) survey to analyse the relationship between self-reported ‘subjective’ explanatory variables and ‘objective’ variables that measure similar domains in explaining overall life satisfaction. We explain about 49% of the variation in individual overall life satisfaction when using 8 of the subjective satisfaction variables included in HILDA, but only about 12% when using 19 of the objective variables covering similar domains. This is partly due to the differences between objective life situations and individual's perceptions of them. Understanding the relationships between objective and subjective variables is imperative for better policy. We find that individual's perceptions of the full range of objective conditions that support their wellbeing is quite limited. An integrated understanding of wellbeing is needed that can incorporate both what individuals do perceive and value and the factors that they do not perceive well but that are nonetheless valuable in supporting their wellbeing.This research was partially funded by the Australian Government through the Australian Research Council on a Discovery Early Career Researcher Award (Project ID: DE150100494)

Resilience of self-reported life satisfaction: A case study of who conforms to set-point theory in Australia.

While self-reported life satisfaction (LS) has become an important research and policy tool, much debate still surrounds the question of what causes LS to change in certain individuals, while not in others. Set-point theory argues that individuals have a relatively resilient LS or "set point" (i.e. there is a certain LS level that individuals return to even after major life events). Here, we describe the extent to which LS varies over time for 12,643 individuals living in Australia who participated in at least eight annual waves of the Household Income and Labour Dynamics in Australia (HILDA) Survey. We use the standard deviation (SD) of year-on-year LS by individuals (SD of LS) as a measure of instability and an inverse proxy for resilience. We then model SD of LS as the dependent variable against average LS scores over time by individual, Big Five personality scores by individual, the number of waves the individual participated in, and other control variables. We found that SD of LS was higher (lower resilience) in participants with a lower average LS and greater degrees of extraversion and agreeableness. Set-point theory thus applies more to individuals whose average LS is already high and whose personality traits facilitate higher resilience. We were able to explain about 35% of the stability in LS. These results are critical in designing policies aimed at improving people's lives