Abstract:
This paper investigates the role tax and transfer policies changes played in the increase in disposable income inequality over the 1988-2013 period. Utilising the Household Economic Survey (HES) and a behavioural microsimulation model (Treasury’s TAXWELL-B) the relative contributions of tax policy and changes in various sociodemographic characteristics (age, highest educational attainment, and employment status) to the change in inequality are estimated. Tax and transfer policy changes are found to have had a major role in the increase in income inequality, accounting for around a third of the observed increase. Furthermore, non-policy related changes in the employment distribution also increased income inequality. However, increases in tertiary educational attainment and the proportion of workers in their prime earning years were both factors that were reducing income inequality over this same period. With these factors pushing in separate directions, this research also indicates that there are significant unobserved determinants of the rise in income inequality that cannot be attributed to the static role of tax-transfer policy, age, education, or employment status distributions.
