Redistribution of Income

What does it mean? Why does the Government get involved?How does the Government get involved?

Redistribution of Income

• Economists generally believe that (if left to its own devices) “the market” will produce the most efficient economic outcomes

• In the case of the distribution of income this is not always correct

• E.g. widening of income inequality in Australia in recent decades

Re-Distribution of Income

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Taxation

• Tax plays an important role in the distribution of income. Some definitions are below:

• Tax Base: All of the items which are taxed (income, wealth, consumption)

• Average Rate of Tax (ART): Proportion of total income earned that is payed in the form of tax

• Marginal Rate of Tax (MRT): The proportion of any increase in income that it paid in tax

Progressive, Regressive, Proportional

• Progressive tax: Higher income earners will pay a higher proportion of their income as tax

• Regressive tax: Higher income earners pay a lower proportion of their total income as tax

• Proportional: All income earners pay the same proportion of their income as tax

Calculating personal income tax payable

• Use the tax table in Mr Shirlaw’s text (pg. 222) to calculate the income tax payable by a person earning:

• $67,000 per annum

• $4,600 per annum

• $136,000 per annum

Social welfare payments

• The Federal Government redistributes its taxation revenue to low income earners via Social Welfare Payments

• These payments account for > 40% of Government expenditure

• e.g. unemployment benefits, family benefits, pensions

• Aged pension is the largest area of social welfare payments (will this continue?)