Unit 1
Unit 2
The Distribution of Income and Wealth
While microeconomic reforms and monetary policy will both affect equity indirectly, the government uses the federal budget in a very direct way to try and solve this problem.
Through the Budget, the government levies income tax. Income tax in Australia is levied in a progressive manner. This means that those on higher incomes pay a higher rate of income tax than those on lower incomes. At the moment, taxation rates in Australia are charged at the following rates:
Tax rates 2009-10
| Taxable income | Tax on this income |
| $0 – $6,000 | Nil |
| $6,001 – $35,000 | 15c for each $1 over $6,000 |
| $35,001 – $80,000 | $4,350 plus 30c for each $1 over $35,000 |
| $80,001 – $180,000 | $17,850 plus 38c for each $1 over $80,000 |
| Over $180,000 | $55,850 plus 45c for each $1 over $180,000 |
We can use this table to help us to calculate the total income tax payable on our income. For example, if I earned $60,000 each year, then I would pay $4,350 plus $0.30 for each dollar over $35,000. This can be calculated as:
| - | $60,000 |
| $35,000 | |
| $25,000 |
We then take this figure, and multiply it by the income tax rate applicable to that band. In this case, that rate is 30%:
| x | $25,000 |
| 30% | |
| $7,500 |
Adding this figure to the $4,350 that we must pay for being in this band gives us the total tax payable on $60,000:
| + | $7,500 |
| $4,350 | |
| $11,850 |
In other words, a person who earns $60,000 a year will pay $11,850 in tax. From the table above you can see that those on higher incomes will pay a higher rate of tax, while those on lower incomes will pay a lower rate of tax.
It is worth noting that the word marginal refers to the fact that the band tells us the rate of tax payable on the next dollar which is earned. All taxpayers, even those on very high incomes, are exempt from tax on their first $6,000 of income, and all taxpayers pay 15% on the income earned between $6,000 and $35,000.
The government uses the money raised through income tax to fund the welfare program. This program helps to ensure that the distribution is even more equitable. As a result of the programs implemented through the Budget, we would expect to see the distribution of gross income be more equitable than the distribution of factor income (it is), and the distribution of disposable income should be even more equitable (and once again, it is).
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