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We quantify and compare the welfare loss from increasing government revenue using different tax instruments by applying the marginal excess burden approach. We use a dynamic general equilibrium, overlapping generations model calibrated to Australian data and primarily concentrate on three taxes: personal income tax, company income tax and consumption tax. Our results indicate that the company income tax is more distorting than the other two taxes. Specifically, the marginal excess burden for the company income tax is 83 cents per dollar of tax revenue raised, compared to 34 cents and 24 cents for the personal income tax and consumption tax, respectively. Moreover, the excess burden is distributed unevenly across skill types and ages, and over time. Our marginal excess burden analysis provides a simple but effective index for evaluating relative costs and benefits of different taxes at the margin.
Sebastian Wende is currently a PhD candidate at the ANU with the Research School of Economics. Sebastian’s PhD compares the distortions from different taxes using Overlapping Generation Models. Sebastian was inspired to undertake a PhD after his work for Treasury which included working on the report for the business tax working group and the Re:think tax discussion paper. His time at Treasury allowed him to identify questions that weren’t be effectively addressed in the academic literature. Sebastian also previously spent time working at the RBA.
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