Means-tested child benefits and progressive tax systems both aim to support low-income families, but often create high and non-linear effective marginal tax rate schedules. This paper explores the joint optimization of these systems within a dynamic general equilibrium model of overlapping generations, calibrated to Australia (2012-2018). The model incorporates household heterogeneity in family structure, age and number of children, female human capital, and uninsurable earnings risks. I find that a standalone optimal tax system would reduce tax progressivity, encouraging labor supply among highly educated women but increasing tax liabilities on low-income parents, thus undermining the objectives of child benefit programs. A jointly optimized system combines low tax progressivity and a universal lump-sum child benefit equal to 30% of median income (around AUD 18,000 in 2018), partly to offset the additional tax burdens on low-income parents. This integrated approach substantially improves overall and parental welfare, but non-parent households bear notable losses. A moderately reduced benefit, while not optimal, achieves welfare gains for parents with lower costs to non-parents. These findings highlight the importance of coordinating tax and child benefit policies to effectively support vulnerable parents, while cautioning against equity losses for non-parents when policies are optimized solely for overall welfare.

Paper Presentations to Date:

• RSE Macro Seminar 2024 (ANU)
• Workshop by Australasian Macroeconomics Society (WAMS) and Laboratory for Aggregate Economics and Finance (LAEF) 2024 (scheduled)

Download:

• Job Market Paper (10/10/2024)

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)
• Workshop of the Australasian Macroeconomics Society (WAMS) 2021
• Treasury 2022
• Tax and Transfer Policy Institute (TTPI) 2022 (ANU)
• Australian Labour Market Research (ALMR) Workshop 2022 (ANU)

Download:

• Full Article (Economic Record, 2023)
• Technical Appendix
• Slides (11/2022)

Should government transfers to families with children be means-tested? We revisit this question from the unique Australian policy context, where average means-tested child benefits comprise up to 40% of the gross total income of low-income households, coinciding with the distinct M-shaped life cycle profile of labor supply for Australian mothers (Household survey data, HILDA 2001-2020). Motivated by these empirical facts, we explore the aggregate and distributive implications of means-testing and alternative child benefit designs quantitatively through a dynamic general equilibrium overlapping generations model of single and married households with children. Our simulation results demonstrate the significant adverse effects of means-testing on work incentives and human capital development among mothers. A structural reform that replaces the status quo means-tested system with a universal system improves female labor supply, output, and overall welfare while also garnering majority support. However, the universal system increases tax burden by 4 percentage points and negatively impacts single mothers—the intended beneficiaries—by reducing their net lifetime income and welfare. In our model, the inclusion of means-testing is essential for controlling fiscal costs and mitigating the adverse effects of higher taxes. Preserving the existing means-tested system and opting for incremental reforms could potentially result in modest improvements in output and welfare while ensuring a more equitable distribution of welfare gains. Hence, our findings highlight the complex trade-offs between efficiency and equity in designing child benefit programs.

Paper Presentations to Date:

• RSE Macro Study Group (ANU)
• 21st Annual SAET Conference (ANU)
• RSE Annual PhD Workshop 2022 (ANU)
• Western Economics Association International (WEAI) 2023 Conference (University of Melbourne)
• Australian Conference of Economists (ACE) 2024 (University of Adelaide)
• American Economic Association (AEA) 2025 Poster Session (San Francisco, CA)

Download:

• Working Paper (17/09/2024)
• Slides (06/2024)

What do we know about income growth in Australia? How are incomes distributed, and how do earners move within the income distribution? What does this tell us about income inequality and income mobility over time and over the life cycle, and for different demographic groups? This research addresses these questions through the lenses of Australian administrative data (ALIFE and PLIDA) and household survey data (HILDA).