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Working Papers

Aggregate Implications of Child-Related Transfers with Means Testing

Authors: Darapheak Tin and Chung Tran

Abstract: Should government transfers to families with children be means-tested? We revisit this question and provide new insights from the unique Australian policy context, where means-testing is widely adopted to determine eligibility and benefits for child-related transfers. Using the Australian household survey data, HILDA (2001-2020), we document the significant role of these transfers and distinct life cycle patterns of female labor supply and earnings in Australia. We then build a dynamic general equilibrium overlapping generations model of single and married households to quantify the aggregate and redistributive implications of the current means-tested child-related transfer programs and alternative designs. Our findings reveal complex trade-offs among efficiency, overall welfare, and equity in designing an effective child-related transfer system. Specifically, we demonstrate the significant adverse effects of means-testing on work incentives and human capital development among women. A structural reform replacing the status quo means-tested system with a universal system improves efficiency and overall welfare, and garners majority support. However, the new regime increases tax burden and leads to unintended welfare consequences for single mothers—the intended beneficiaries—by reducing their lifetime take-home income and consumption. Adjusting the universal benefit rates does not resolve these inequities and may undermine government support for those in need. In contrast, incremental reforms to the current means-tested system, by relaxing the taper rate of the Child Care Subsidy (CCS) program, can enhance efficiency and achieve a fair distribution of welfare gains, albeit with modest aggregate improvements.

Paper presentations to date: RSE Macro Study Group (ANU); 21st Annual SAET Conference (ANU); RSE Annual PhD Workshop 2022 (ANU); 17th Western Economics Association International (WEAI) 2023 Conference (University of Melbourne); 37th PhD Conference in Economics and Business 2023 (University of Melbourne); SCE 30th International Conference on Computing in Economics and Finance (CEF) 2024 (Nanyang Technological University, Singapore); Australian Conference of Economists (ACE) 2024 (University of Adelaide); Labour Econometrics Workshop (LEW) 2024 (University of Queensland).

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 Working paper (14/06/2024)  
  Slides (19/06/2024)

On the Joint Optimal Design of Taxes and Child-Related Transfers

Authors: Darapheak Tin

Abstract: Means-tested child-related transfers provide a cost-effective approach to supporting low-income families with dependent children. However, in a progressive tax regime, means-testing can significantly increase the effective marginal tax rate (EMTR) and expand the high-EMTR income zone for beneficiaries, especially secondary earners who are predominantly mothers, reducing their labor supply and lifetime earnings. This trade-off between short-term public benefits and lifetime earnings capacity makes characterizing the joint design of taxes and child-related transfers a crucial undertaking to achieve optimal welfare outcomes. For this purpose, this study employs a dynamic general equilibrium overlapping generations (OLG) model of households with varying marital and parental statuses, endogenous female labor supply and human capital formation, and uninsurable earnings shocks. The results, grounded in the Australian policy context, indicate that the joint optimal tax and child-related transfer system features moderate tax progressivity, means-tested subsidies, and universal lump sum transfers per child equivalent to 30% of the median income (approximately AU$18,000 in 2018). Nonetheless, due to the accompanying tax burden, the overall welfare improvement under the optimal system is driven by welfare gains for parents at the expense of non-parents, thus rendering the optimal system inequitable. Furthermore, quantitative results highlight distinct roles for lump sum transfers and subsidies: the former enhance welfare by increasing average level of consumption (consumption efficiency effect), while the latter relax labor supply constraints and allow for better distributive (equity) and insurance outcomes, thereby influencing the dynamics of income process and improving the ability to smooth consumption over time.

Paper presentations to date: RSE Macro Seminar 2024 (ANU).

Publication

Lifecycle Earnings Risk and Insurance: New Evidence from Australia

Authors: Darapheak Tin and Chung Tran

Abstract: This paper studies the nature of earnings dynamics in Australia, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001–2020. Our results indicate that the distribution of earnings shocks displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions. Wage changes are strongly associated with earnings changes and account more for the dispersion of earnings shocks; meanwhile, the contribution of hour changes is largely absent in upward movement and relatively small in downward movement of earnings changes. Furthermore, family and government insurance plays distinct roles in reducing exposure to earnings risk. Government insurance embedded in the targeted transfer system is important in mitigating the dispersion of shocks, whereas family insurance via income pooling and adjustment of secondary earners’ labour market activities is dominant in reducing the magnitude and likelihood of extreme and rare shocks. The magnitude and persistence of earnings risk as well as the insurance role of family and government vary significantly across gender, marital and parental status. Accounting for these non-Gaussian and non-linearity features is important for evaluating the insurance role of government transfer programmes.

Paper presentations to date: A-Life Conference 2021 (Crawford School of Public Policy, ANU); RSE Macro Seminar series (Virtual, ANU); 3rd Annual PhD Workshop 2021 (Virtual; ANU); Workshop of the Australasian Macroeconomics Society or WAMS 2021 (Virtual); Treasury 2022; Tax and Transfer Policy Institute (TTPI) 2022 (Crawford School of Public Policy, ANU); Australian Labour Market Research (ALMR) Workshop 2022 (ANU).

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Full article (Economic Record, 2023)  
Tecnical Appendix
Slides (11/2022)

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