Application Exercise 10z: Changes to the distribution of income
- Distinguish ‘gross household income’ from ‘disposable household income’
Gross household income refers to income received by a household before that household pays income tax, whereas disposable household income refers to the income received by a household after that household has paid income tax, and therefore represents. Disposable income is a more accurate measure of the household’s ability to access goods and services compared to gross income, since it represents the income the household has available to spend.
- Outline why the Gini coefficient for disposable household income is lower than the Gini coefficient for gross household
The Gini coefficient is number measuring the degree of inequality in the distribution of income, and the closer it is to one (1) the more unequal the distribution, and the closer to zero (0), the more equal. Since Australia has a direct taxation system characterised by progressive taxation (the PAYG income tax system, which taxes those on higher incomes at a higher rate compared to those on lower incomes), once income tax is deducted from household incomes, the distribution of income is less unequal compared to the distribution of income prior to income tax being paid (i.e. gross income).
- Use the statistics above to support the contention that the distribution of income has become more even since 2009-10.
According to the data in the table above, the Gini coefficient for (equivalised) disposable household income is lower in 2019-20 (0.324) than it was in 2009-10 (0.329). This indicates that the distribution of income in Australia has become more even since 2009-10. (The distribution of gross income has become less equal, but as noted in the answer to Question 2 above, this provides a less useful indicator of income distribution, as it does not account for the progressive impact of direct income taxation on income distribution in Australia.)
- Explain how the government could change personal income tax rates to reduce the size of the GC in the
To reduce the size of the Gini coefficient in the future, the government would need to increase the progressivity of the tax system for, by example, increasing tax rates at the top end of the income scale and reducing tax rates at the lower end of the income scale.
- Describe two ways that the government could use the ‘expenditure side of the budget’ to achieve a more equitable distribution of income.
The government could use the expenditure side of the budget to provide greater cash support for lower income earners. For example, it could decide to increase the rate of payment to those on unemployment benefits (JobSeeker payment), or pensions or single parents. Alternatively, the government could decide to spend more on public housing as a means of providing non-cash support to low-income households.
- Apart from changes to personal income taxes, describe two ways that the government could use the ‘revenue side of the budget’ to achieve a more equitable distribution of income.
The government could use the revenue side of the budget (e.g. tax collections or excises) to achieve a more equitable distribution of income by imposing higher taxes on those items that are most often consumed by those earning higher incomes, for example by increasing the luxury car tax (since luxury cars are commonly bought by those on higher incomes.) They could also remove the current concessional treatment of capital gains from investment (whereby profits earned from certain investments are only taxed at half the rate of the taxpayer’s highest marginal tax rate). The majority of these investment profits are received by those on higher incomes.