Decomposing Redistributive Effects of Taxes and Transfers in Annual and Lifetime Contexts.

This paper decomposes the redistributive effect on annual and lifetime inequality of a range of taxes and transfers in Australia, using a dynamic cohort lifetime simulation model. The model allows for family formation, births of children, labour force participation of male and females, along with income dynamics. The redistributive effect is decomposed into vertical, horizontal and reranking effects. Horizontal inequities in the tax and transfer system are found to be negligible. The extent of reranking is much greater in the lifetime than in the annual context and is significantly affected by the equivalence scales used to adjust household incomes. If no adjustment is made to household incomes, reranking is about 9 per cent of the reduction in lifetime inequality. However, if each child is counted as equivalent to one-third of an adult, reranking is found to be less than 1 per cent.