ABSTRACT
This chapter analyzes the effects of unindexed tax systems on the incentive to work and the distribution of income. It reviews the familiar individual labour supply model and deals with unindexed tax systems. The chapter shows that the predicted effects on labour supply depend both on the shape of the tax schedule and on the rate of inflation. It illustrates the arguments for the British and Australian tax systems. The chapter considers the implications of the analysis for the size and distribution of national income. The Australian rates start very much lower, but the tax bands are narrow and rates exceed British rates for middle incomes and fall British rates at high incomes. Whether someone’s income remains in the same band depends not only on the width of the bands but also on the rate of inflation and whether the individual is near the top of the band.
