To what extent can a tax and transfer system moderate the distributional impact of uneven economic growth? We address this question within the unique Australian context of uninterrupted economic growth and highly progressive tax and transfers from 1991 - 2019. Using tax records of millions of taxpayers, we document income growth over time, across the market income distribution and within 9 different cohorts in regards to their lifetime incomes. We find that while the majority of Australians benefited from market income growth during the 3 decades, gains were shared unevenly between individuals and across generations. Top income groups reaped disproportionate benefits relative to the rest. Importantly, progressive income tax and transfers played a significant role in moderating these uneven gains across groups and over lifetimes. While income inequality between cohorts rose over time, the magnitude of lifetime inequality within cohorts was much lower. This finding highlights the potential biases when using a point-in-time (cross-sectional) approach to examining income inequality. Finally, we construct a structural model and explore the potential impact of different tax system designs. Our simulation results highlight trade-offs between aggregate efficiency and income inequality when relying on higher tax-transfer progressivity to reduce inequality in a dynamic general equilibrium framework.

Nabeeh Zakariyya is a postdoctoral fellow at the Research School of Economics, ANU. His research examines macro-fiscal and distributional impacts of tax and transfer policies.