Policy Impact

The Distribution of Income

The budget is the main policy used to assist in the achievement of an equitable distribution of income. There are three main ways in which fiscal policy has been used to help reduce the level of inequality in the Australian economy.

Progressive Income Tax: Income tax in Australia is levied in a progressive manner. This means that as a person’s income increases, the percentage of their income that is taken in tax will also increase. However, it is important to note that the income tax rates are known as marginal tax rates. This means that as your income increases, you will only pay the new rate of tax on every dollar that you earn over the income threshold. For example, imagine that the tax free threshold of $6,000 had been set by the Australian government. For any income over that amount, we would pay 15% tax. This means that if you earn $6,100, you will only pay tax on the $100 ($6,100-$6,000). In other words, you would pay $15 in tax. The progressive income tax system has been designed in such a way that high income earners will pay more of their income in tax, and as such their disposable income will be lower than would otherwise have been the case. Around 54% of budget revenue – close to $120 billion – is received by the federal government in this way each year.
Transfer Payments: At the other end of the scale, the federal government is also responsible for ensuring that those who receive relatively low levels of factor income are still able to meet their basic needs. This is done through a process of transfer payments. In effect, the money is “transferred” from those who have more than most to those who have less than most through the process of fiscal policy. Examples of transfer payments include unemployment benefits, disability allowances, retirement benefits and war veterans payments.
The GST: The GST was introduced by the Liberal government in July 2000. Despite the fact that it is regressive in nature, the GST was implemented in part to assist in the process of making income distribution more equitable. At the time, the Australian taxation system had many problems. One such concern was that the heavy reliance on income tax meant that those on higher incomes were more easily able to employ tax minimisation schemes, and as such the reliance on lower income earners was increased. By creating a tax on consumption, the level of income tax was able to be reduced. As people on higher incomes consume more than those on lower incomes, it follows that they should pay more of the tax. This was reinforced when negotiations prior to the introduction of the taxation system saw most “needs” (such as staple food products) exempted from the tax. As a result, the tax burden shifted from middle income earners to higher income earners, and the distribution of income improved. (It should be noted that this is the official position adopted by the government in regards to the GST, and there are many in the community who would disagree. For example, when buying a washing machine you will pay GST. This is quite a standard household item, and it is also relatively expensive. The GST has made it more difficult for low income earners to own items like this, and when they are purchased the regressive nature of the GST will be apparent. As a result, you should be very wary of the way in which you explain the impact of the GST on the distribution of income in Australia.)

To assess the impact of fiscal policy on the distribution of income, we need only examine the Gini co-efficient for two different types of income in the same year. Regardless of which year you examine, you will find that the Gini co-efficient for disposable income will always be lower than the same statistic for factor income. This suggests that the interventions adopted by the federal government have helped to achieve a more equitable distribution of income in this country.

It is also worth noting that there have been some long term projects that have been implemented through the budget to try and reduce the level of disparity that is seen in the Australian economy. For example, matched superannuation payments for low income earners were introduced through the budget. Although the money offered by the government is not available for spending in the short term, these funds will help to ensure that a person who has survived on a low income during their working life will have access to a larger pool of savings when they retire.

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