Income Distribution in Australia: Explanation and 2024 trends

Syllabus Topic

HSC Topic Four - Economic Policies and Management

Economic objectives in relation to:

• distribution of income

Income distribution as an economic objective

Income distribution as an economic objective aims to ensure fairness in the allocation of income among individuals or households within a society. By striving for a more equitable distribution, governments aim to reduce poverty, promote social stability, and stimulate economic growth. Policies such as progressive taxation, social welfare programs, and minimum wage laws are often used to address income inequality and foster a more inclusive economy. If income inequality becomes persistent or widens, it can lead to lower consumer demand, hinder social mobility, limit access to opportunities, dampen innovation, and threaten economic stability.

Australia: Progressive taxation system

Australia's progressive taxation system is designed to impose higher tax rates on individuals with higher incomes, thereby distributing the tax burden more equitably across society. Under this system, tax rates increase progressively as income levels rise, with lower-income earners paying a lower proportion of their income in taxes compared to higher-income earners. This approach allows the government to collect revenue to fund essential services while also addressing income inequality by redistributing wealth. Additionally, Australia's tax system includes various deductions, offsets, and concessions to ensure that the burden of taxation is not overly burdensome for lower-income households.

2024 – Bracket creep and Stage Three tax cuts

Bracket creep, a term frequently referenced in current discussions surrounding the Australian government's proposed stage three tax cuts, has significant implications for income distribution. As wages increase over time, individuals may find themselves pushed into higher tax brackets, resulting in a higher proportion of their income being taxed. According to Associate Professor Ben Phillips from the Australian National University, Australia's tax thresholds are not indexed to inflation, exacerbating the issue of bracket creep. For example, a median salary earner of $67,600 could see their take-home pay reduced due to bracket creep, even with a wage increase in line with inflation. The proposed stage three tax cuts aim to address this by adjusting tax brackets and rates. If implemented, these changes could lead to a substantial increase in take-home pay for many Australians, potentially alleviating the impact of bracket creep on income distribution and promoting economic stability.

UNSW and ACOSS report: Income Inequality in Australia 2024

• The report highlights that the top 10% of households by weekly income earn an average of $5,248 after tax, over three times the income of the middle 20% ($1,989) and six times that of the lowest 20% ($794).

• Wealth inequality data reveals that nearly half of all wealth is held by the top 10% of households, with an average net worth of $5.2 million each, while the lowest 60% of households hold just $343,000 per household.

• Over half (53%) of the wealth of older households is owned by one-sixth of older individuals, with an average wealth of $5.6 million, emphasizing concentrated wealth among a small segment of the population.

• The disparity in wealth extends across age groups, with the average household over 65 being 25% wealthier ($1.58 million) than middle-aged households ($1.26 million) and nearly four times as wealthy as households under 35 ($410,000).

• Despite a marginal reduction in income inequality, wealth disparities persist, indicating ongoing challenges in achieving equitable income distribution in Australia.

• Policy recommendations stress the importance of addressing income distribution gaps through measures such as raising income support payments, reforming taxation policies, and promoting equitable access to housing and wealth-building opportunities.

Sources

Australian Government: 2024-25 Thresholds and Tax Cuts

SBS News: What is Bracket Creep and How Can It Reduce your Take-Home Pay?

UNSW Newsroom: Wealth Gap Widening: New Report