The tax policy agenda in Australia for more than a decade has been largely driven by a perceived need to reduce the level of income taxation and the progression of marginal rates, financing the revenue shortfall with a broad based consumption tax. A major reform of this kind is now being implemented under the Howard plan for “a new tax system”. Recent debate has turned to the possibility of an Earned Income Tax Credit scheme as a solution to the problem of an emerging class of working poor resulting from ongoing labour market reforms. This paper subjects these policy reforms to a detailed theoretical and empirical analysis. The findings suggest that the reforms are seriously limited in terms of their distributional outcomes, particularly in the context of growing wage inequality in the labour market. The analysis also shows that the reforms are unlikely to improve the efficiency and growth of the economy due to disincentive effects on labour supply and saving behaviour.
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