Optimal Marginal Income Tax Reforms: A Microsimulation Analysis

Date Added: Aug 2009
Format: PDF

Extensive research has shown that few robust results regarding the optimal tax structure are available. Moreover, the stylized models used in optimal tax analyses are not appropriate for practical policy advice. This paper proposes a method of examining optimal marginal income tax reforms using behavioral micro simulation models in which the full extent of population heterogeneity is represented along with all the details of highly complex tax and transfer systems. The approach is illustrated using the Australian micro simulation model MITTS.