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Macro Public Finance Lab @ ANU
Micro data and macro models for better economic policy

Welfare Transfers


Aggregate Implications of Child-Related Transfers with Means Testing

Darapheak Tin and Chung Tran

[Paper] [Slides]

Inclusion of means testing in child-related benefit payments allows for the distribution of limited government fund to families most in need; however, it results in disincentive effects. To what extent should income test be used in child-related transfer programs? In this paper, we address this question in the Australian policy settings where all child-related transfers are strictly meanstested. We begin by providing some stylized facts on child-related transfers and life-cycle labour supply of mothers. We next build a dynamic general equilibrium overlapping generations model of single and married households with children and quantify implications for female labour supply, macro aggregates and welfare. Our results indicate that a strict means testing rule results in significant adverse effects on secondary earners’ work incentive as households with children face very high effective marginal tax rates. Relaxing the current means testing rule induces more labour supply and human capital accumulation of female workers, which subsequently leads to efficiency gains and welfare improving. However, abolishing the means testing rule entirely is not socially desired due to large fiscal distortions of tax financing. We characterize combinations of the maximum payment and taper rate that results in welfare improving outcomes