Balancing Efficiency and Equity in the Tax and Transfer System

Tax-transfer systems in developed countries balance a range of competing objectives. They raise revenues to pay for public goods, to achieve redistribution and poverty alleviation, and to address inequality. They provide protection against a range of social risks, either through taxes and transfers across the lifecycle or social insurance. Tax-transfer systems appear quintessentially public – we raise taxes to fund government and provide transfers in the welfare state. However, contemporary tax-transfer systems are interdependent with markets for work and saving and the non-market ‘care’ or household economy. In seeking to balance objectives of equity and efficiency in tax-transfer systems, governments are concerned to maximise policy effectiveness and to minimise adverse outcomes such as reduced propensity in relation to incentives to work or save or to form or dissolve families or households. Governments, meanwhile also want to guarantee the long-term sustainability of the system. This chapter examines the Australian system of taxes and transfers in an international comparative perspective, with a particular focus on family and child benefits. This case study illustrates the hybrid nature of the system and enables an inquiry into whether it is successful in balancing equity and efficiency.