Work Incentives under a New Tax System: the distribution of effective marginal tax rates in 2002

Effective marginal tax rates (EMTRs) provide a way of measuring the balance between targeting of welfare payments and the financial incentive to work. Individuals who face high EMTRs over broad ranges of income have little financial incentive to increase their earned income.
High EMTRs often result from income tests for welfare payments overlapping with each other and/or the income tax system. One question we may ask is whether it is those at the lower end of the income distribution - who are the very people that society would like to encourage to undertake paid employment, or increase their level of paid employment - that face the greatest financial disincentives
for doing so.

This paper uses STINMOD, NATSEM's microsimulation model of the income tax and social security systems, to examine the distribution of EMTRs across the Australian labour force in 2002. It also looks at how the number of people facing high EMTRs has changed since the introduction of the new tax system.