The Distribution of Income and Wealth

It is easy to confuse the concepts of income and wealth, but in reality they are very different. It is possible for someone to have access to a great deal of wealth, even if they don’t have an income. (If a person had $10 million in the bank, and they didn’t have a job, would you consider them wealthy? I would!)

As a result, wealth can be defined as the value of our assets (property, stocks, businesses, shares and so on) minus the total debt that we owe.

Income, on the other hand, is a bit different. Accountants refer to income as a flow of funds – it is money that comes in on a regular basis. For example, you might not own any assets at all, but if you have a job you will be receiving an income for completing that work. There are several different types of income, and each has its own definition.

Factor Income: This is money that is received when you use a factor of production. For example, if I work for someone I am using my labour resource. The money that I receive (my wage) is referred to as factor income. I can also gain profits from using capital resources, and rent from using land resources. Interest and dividends that are paid on money that I might have invested are also forms of factor income.

Transfer Income: Some people do not have access to any factor income. These people may not own any resources, and as such the only way they can earn an income is to work. If they are unemployed, then this is not an option either. Other people might not be able to work as long as they would like due to personal injury or disability, and still others might be retired. In these situations, the government will pay some form of financial support. This could be in the form of an unemployment benefit, a pension or possibly a disability allowance. Any income received in this fashion is referred to as transfer income.

Gross Income: This is defined as the total amount of money that I have received before taxes are taken into account. It is simple to calculate; all you need to do is add the factor income received by a person to the transfer income that they have received.

Disposable Income: When a person earns and income in Australia, they are obliged to pay income tax. We will look at this in more detail later, but for now you should be aware that after we deduct the income tax that has been paid from our gross income we are left with our disposable income. This is the amount that we can choose how to spend.

Final Income: We will choose to spend some of the money that we receive, and when we do we will end up paying more taxes. Indirect taxes are government charges that are added to the price of almost all goods and services in Australia. For example, the GST is an indirect tax. Our final income is calculated as our disposable income minus the impact of any indirect taxes. This calculation is made because indirect taxes do not satisfy our needs and wants; they are additional charges that must be met when we buy a product. Also, indirect taxes will affect some people more than others.

It is worth noting one other important concept at this stage: Social Wage. The social wage is a theoretical concept used to explain the distribution of income after the impact of non-financial assistance from the government is taken into account. For example, the government in Australia provides us with roads, parks and libraries, all of which we can access without cost. When we take these things into account, we recognise that our standard of living is affected by these products as well.

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