Distribution of income

Fiscal policy plays a significant impact on influencing the distribution of income in the
economy
Progressive income taxation system + Transfer payments redistribute incomes
from higher income earners (who pay more tax to create a revenue base) to lower
income earners (e.g. unemployment benefits, disability benefits, pensions, family
childcare subsidies which are means tested)
Discretionary Changes in taxation
To improve income inequality, the government can reduce the amount of tax
paid by low income earners. E.g. in 2012-13 (tax free threshold)
Reduction in marginal tax rates for high income earners will result in
increased income inequality. (e.g. 2015-16, 37% marginal income tax bracket
shifted from $80k to $87k benefitting the top 25% of income earners.)
Effectiveness is hindered by
Regressive consumption/excise tax e.g. the 10% GST and the tobacco
excise tax which is expected to increase by 50% over the next 4 years. These
taxes primarily impact low income earners, taxing a higher proportion of their
income.
Tax concessions for high income earners and company tax cuts which
increase the taxation burden on low income earners. E.g. negative gearing,
capital gains tax discount, superannuation concessions.
Provision of civic amenities such as health care, education, transport provide a
greater proportional benefit for low income earners.
Superannuation policies
Superannuation policies are intended to improve the distribution of wealth in
the economy.
The governments policy of compulsory superannuation of 9.5% paid by
employees has improved the distribution of wealth in the economy as
superannuation comprises a significant proportion of the financial assets
owned by low income earners.
Policy to increase superannuation to 12% by 2025 will seek to further improve
wealth inequality.
The recent 2016-17 budget also proposed measures to improve wealth
inequality by reducing the level of superannuation tax concessions given to
higher income earners. Including a cap of 25K a year from 30K a year for
contributions to superannuation (which are taxed at 15%) and a life time cap
of 0.5 million. This will work in tandem with the Low Income Superannuation
tax offset (providing a 500$ rebate for low income earners) to make in the
distribution of income less unfair
Labour Market Policies/ Reform
The fair work act 2009 helped facilitate the movement away from a
centralised wage system to enterprise bargaining, however it included
measures to improve income inequality.
Minimum wage $17.70 /hr, establishment of NES (sick leave, right to have
flexible hours) and a system of modern awards
Limitations: Decentralisation has resulted in increased wage dispersion
between and within industries as higher skilled workers can bargain for
increased wages.
Distribution of Income and Wealth

Definition
Income:
 Defined as the amount of money that flows to individuals or households from the sale
or ownership of factors of production, over a period of time. Examples include wages
from labour, rent from land, interest from capital and profit from enterprise.
Wealth:
Defined as the net value of a persons assets, accumulated over time. Calculated by
assets minus liabilities.
Income inequality refers to the degree to which income and wealth is unevenly distributed
among people in the economy.
- In Australia, the top 20% of income earners earn 38.5% of total income whereas the bottom
20% earn only 7.7%.
- However, the distribution of wealth is more unequal than the distribution of income with the
top 20% owning 61% of total wealth and the bottom 20% earning only 1% of total wealth.
- The Gini coefficient is used to measure the extent of income inequality within an economy.
Australia has a Gini coefficient of 0.33, with perfect equality at 0 and perfect inequality at 1.
The impacts of income inequality are widespread, having both economic and social impacts.
Nevertheless there are government policies that are designed to alleviate the level of income
inequality within the nation including: Progressive income tax, transfer payments, provision
of civic amenities, labour market policies and compulsory superannuation.

(if necessary a paragraph on the Lorenz curve to see how income inequality is
measured...include only if the Q is about inequality only)
The degree of income inequality can be diagrammatically represented through a
lorenz curve.
The lorenz curve graphs cumulative population against cumulative income with a 45
degree line representing perfect equality. The Gini coefficient is taken by measuring
the proportion of the Area A over the total Area of A + B.

Causes

Economic causes (LEI)

Labour market reforms:
Labour market reforms including the decentralisation of wages and the
introduction of enterprise agreements have resulted in inter and intra industry
wage dispersion.
 Enterprise agreements provide the link between income increases and
productivity improvements. Hence higher skilled workers can bargain for
higher wages whereas low skilled workers have less bargaining power.
Also, more efficient firms in an industry can pay higher wages, causing intra
industry wage dispersion.
Furthermore, efficient industries with a shortage of skilled workers can attract
higher skilled workers with higher incomes, resulting in increased inequality
between skilled and unskilled labour.
Although labour market reforms have improved the flexibility of the labour
market, it has contributed in the Gini coefficient increasing from 0.3 in 1996-
97 to 0.33 in 2013.
Economic growth
Increase in growth: Leads to higher inequality, as the economic benefits
generally flow to higher income earners. For example in times of higher
economic growth, there is greater demand for skilled workers which will bid
up their incomes. Furthermore, people on high incomes tend to be the owners
of financial assets such as stocks, investment properties and businesses
which will see greater returns due to higher growth.
After 25 years of economic growth, income inequality seems to have
widened with the poverty rate increasing from 12% in 2003 to 14% in
2016
Decrease in economic growth: Also leads to higher income inequality as
cyclical unemployment increases, lower income earners have a greater
chance of being retrenched. This forces them to rely on transfer payments
from the government, resulting in higher levels of income inequality.

Further information
It can also be argued that there comes to a point where the economic benefits will
trickle down as income inequality generates more job opportunities. This is shown
by the Kuznets curve.
Income inequality is shown to increase to a turning point where beyond this point,
there is improving equality. Reflecting the capacity of government policies to reduce
inequality through discretionary policies and automatic stabilisers.
 High inflation
Erodes the real income or purchasing power of those on fixed incomes or
lower incomes. Often these workers do not have sufficient bargaining power
to index their wages to inflation increases. On the other hand, higher income
earners own financial speculative assets whose value increases with inflation.
Thus both income and wealth inequality are worsened by higher inflation.

Social Causes (Age, gender, culture, geography: AG-CG)

Age and education:

- Income tends to be highest between ages of 25 and 64
- Younger workers have less skills and experience
- Higher skilled and trained workers can attract higher incomes. People with a degree make
more than diploma, who make more than vocational and year 12 and below.
Gender and occupation:
- There is a gender pay gap of women making 15-18% less than men. This gender gap
exists as a result of several reasons.
- In the past, women had fewer opportunities (1) to acquire education, skills and experience.
- Culturally, women have more home caring responsibilities (2) than men. This means that
they often work part time which limits their chance of getting senior high income positions.
- Women experience direct and indirect discrimination, limiting their chance of getting a
promotion: the glass ceiling (3)
- Men and women choose different occupations (4), jobs that require a higher level of
education and/or are more risky, so attract higher pay. (mining, construction)
Ethnic and cultural background
- Recent migrants from English-speaking countries tend to earn more due to communication
being a desired skill.
- Income distribution among all migrant groups slowly conforms to the Australian average.
Geography
- Inequality exists between different states and between cities.
- ACT has highest weekly earnings, TAS lowest
- WA and NT have benefited from recent mining boom.
- In NSW, people in urban areas earn 30% more than those in regional areas, reasons are
different costs of living and employment opportunities.

Impacts: (GLU: growth, long-term, utility)

Economic costs:
Economic growth through AD
Higher Gini coefficient is associated with lower economic growth over the medium
term. This is because low income and middle earners have a higher APC (i.e they
spend a greater proportion of their income) than higher income earners who have a
higher APS (i.e. They save more). So inequality suppresses AD and undermines
economic growth.
Hence if lower income earners have higher disposable incomes, they will spend a
relatively higher amount on consumption than on savings, which will in turn stimulate
economic activity. (multiplier effect)
Stat: The IMF (2015) found an inverse relationships between income share accruing
to the top 20% and economic growth. If the income share of the top 20%
increases by 1% of GDP, GDP growth decreases by 0.08%, suggesting that the
benefits do not trickle down to lower income groups.
Entrenched income inequality lowers long term growth
Higher inequality deprives the ability of lower income households to stay healthy and
accumulate physical and human capital.
Examples would be an under investment in education as the families of poor children
are unable to afford the fees associated with tuition e.g. buying textbooks, uniform.
These children are deprived of the opportunity to pursue a higher education.
Negatively impact economic growth in the long term as it lowers the overall quality of
the labour force and reduces labour productivity.
Income inequality increases welfare support
Moreover, entrenched inequality can cause people to leave the workforce and
become reliant on government services, thus increasing government expenditure.
Inequality reduces overall utility
Inequality reduces the total satisfaction (quality of life) gained from goods and
services by people in society, because the marginal utility of income diminishes
for higher incomes. An extra dollar for low income earners means more to them
than one dollar for high income earners.

Social costs of income inequality

Individual costs
Higher income inequality can undermine an individuals educational and occupational
choices.
Citizens can lose confidence in institutions, eroding social cohesion and confidence
in the future. Those with lower incomes can suffer from lower self-esteem.
Social cohesion: income inequality can lead to division within society, creating a
divide between the poor and the rich. This is often the result of conspicuous
consumption by higher income earners.
Higher levels of poverty, which is linked to increased social problems such as crime,
violence, theft, anti-social behaviour and family disputes

Economic benefits of income inequality

Encourages the labour force to increase education and skill levels

 If those with higher qualifications and skills reap higher incomes, new entrants to the
labour force are encouraged to improve their education and skills.
This improves labour productivity and economic growth in the future.
Makes the labour force more mobile
Inequality among regions of Australia will encourage people to move to where tehy
can get higher incomes.
For example mining sector growth attracted migration to WA and NT.
Improves the efficiency of labour allocation; allows efficient firms to attract
labour.

Potential for higher savings and capital accumulation

Higher income earners save a larger proportion of their income levels. Increased
savings should reduce Australias reliance on foreign capital and provide additional
funds for domestic investment opportunities.
Encourages risk-taking
Encourage risk-taking because there are higher potential rewards.

Policies
- 1. A Progressive taxation system + B Transfer payments: Requires higher income
earners to pay a higher proportion of their income in tax.
- This progressive tax provides the revenue from which the government can fund transfer
payments such as pensions, unemployment (job search allowances) and disability benefits
that generally flow to lower income earners, effectively redistributing income.
- Australias Gini coefficient before before taxes and transfers is 0.52. After it is estimated to
be 0.33, demonstrating an effective redistribution of income from high income earners to low
income earners.
- 2. Taxation reform: The government can also alter the taxation system to improve the
equitable distribution of income.
- E.g. Increasing the tax free threshold from $6000 to $18200 from in 2012-13 + Low
income superannuation tax offset which provides lower income earners with a $500 rebate
on their tax.
- 2016-17 budget: Removal of family tax benefit B for families with kids 13-18: It is
means tested, so worsens the distribution of income
- 3. Provision of civic amenities: Government payments to the unemployed, low income
earners and the elderly, as well as services in health (universal healthcare), education and
housing reduce inequality. Also universal access to free education.

BUT Regressive taxes such as consumption tax:

- However, consumption taxes (e.g. GST and excise tax on tobacco) means that the lowest
40% of income earners have a higher tax burden (15% of taxes) compared to their income
(12%).

Reducing unemployment using macroeconomic policy:

- Since employment is the main source of household income (56% of income comes from
wages and salaries), unemployment is the main cause of low incomes. Unemployed people
must rely on government benefits, which are significantly below the average incomes earned
by employed people.
- The government tries to prevent people from becoming long-term unemployed, which
would cause them to lose skills and future income. Expansionary fiscal and monetary
policies are used during a downturn (e.g. GFC).

Labour market policies: (3 things)

- Decentralisation has widened wage inequality (wage dispersion), but awards in the Fair
Work Act 2009 set minimum wages for every type of employment.
- Safety net of modern awards (minimum wage+conditions per type of employment)
- the national employment standards (non wage outcomes)
- There are also provisions (e.g. bargaining in good faith) to help low paid workers engage
in enterprise bargaining.
- The Fair Work Commission regularly raises the minimum wage - currently $17.70. This
has flow-on effects of raising the overall wage structure for low-income earners.
- Vocational training and education programs increase skills, allowing people with low
skills and incomes to improve. $150m structural adjustment package for re-training and re-
skilling in auto industry.
PaTH - skills for youth decreases youth unemployment, preventing long term reliance on
welfare

Compulsory superannuation (Wealth)

- This has significantly improved the distribution of wealth since its introduction in 1992.
- Employers must contribute at least 9.5% of an employees wages to a superannuation fund
which they cannot access until their retirement. 94% of employees are covered by
superannuation.
- Superannuation is particularly important for the bottom 20% of wealth-holders, because it
one of few significant financial assets they have.
- Compulsory super will increase steadily to 12% by 2025.
- However, tax concessions given to voluntary superannuation contributions mainly benefit
high income earners (because the super contributions are taxed lower than their income).
- The 2015-16 budget will have stricter caps on tax concessions (only $25k a year can be
deposited at a tax rate of 15% instead of $30k, and a $0.5mil lifetime cap.)

Indirect impact of government policies

- Higher interest rates (contractionary monetary policy) transfers wealth from low to high
income earners because low income earners tend to be net borrowers while high income
earners tend to be net savers.
- Microeconomic reform can cause structural unemployment and increase inequality.
- Privatisation is often followed by downsizing of the workforce in attempts to increase
profitability. Benefits flow to wealthier asset owners while its costs are felt by low income
earners.

- Microeconomic policies are often accompanied by adjustment packages to alleviate

the inequality caused. E.g. the carbon tax came along with tax cuts and higher family
benefits for those earning under $150k.