Removing poverty traps in the tax transfer system

by David Ingles

The Australian tax-transfer system targets those in need and, as a consequence, is prone to poverty traps, areas where higher private income leads to very little gain in disposable income, and high effective marginal tax rates (EMTRs) in general. This can severely impact on people’s ability to work their way out of poverty. Particularly acute disincentives face people in subsidised state rental housing. This paper examines available evidence on the EMTR problem, then looks at various incremental solutions before considering more radical solutions such as the negative income tax (NIT).

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