Task 7

What is the difference between income and wealth, and how are they linked?

• Income represents a flow of funds (money received over time).

• Wealth represents a stock of assets (what a household owns).

• Link: The higher a household's income, the greater its ability to save, invest and build wealth over time.

What is private income?

Private income is money earned by households through their own economic activities and assets. Sources include:

• Employment (wages and salaries)

• Interest from savings

• Rent income

• Dividends from shares

What is gross income?

The total income a household receives before taxes are deducted.

Gross income = Private income + Pensions and cash benefits

What is disposable income?

The income a household has remaining after taxes have been deducted.

It is used to purchase goods and services or contribute to savings.

According to the diagram:

Disposable income = Gross income − Direct and indirect taxes

What is final income?

Final income = household's disposable income + value of indirect government benefits.

These benefits include:

• Education subsidies

• Healthcare subsidies

• Childcare subsidies and concessions

What is the difference between direct and indirect taxes?

• Direct taxes: Taxes paid directly on income, such as personal income tax.

• Indirect taxes: Taxes applied to expenditure when purchasing goods and services, such as GST.

How is wealth accumulated?

Wealth can be built through:

• Savings from income

• Financial investments

• Business profits

• Inheritance

How does the Australian Bureau of Statistics (ABS) define household wealth/net worth?

The difference between a household's total assets and liabilities.
Household assets include: 

• property

• shares

• savings

• superannuation 

 Household liabilities include: 

• mortgages

• personal loans

• credit card debt

Wealth = Total assets − Total liabilities

What is absolute poverty?

Absolute poverty occurs when people live below a subsistence level of income, meaning they cannot afford the basic necessities required for survival.

Very few Australians experience absolute poverty, according to the textbook.

What is relative poverty?

Relative poverty occurs when individuals or households have insufficient income to achieve the minimum standard of living considered acceptable by society.

According to the textbook, approximately 20% of Australians experience relative poverty.

What is the Lorenz Curve, and what does it measure?

The Lorenz Curve is a graph that shows how income or wealth is distributed across a population, measuring the degree of economic inequality.

What do the axes of the Lorenz Curve represent?

• Horizontal axis (X-axis): Cumulative percentage of the population, ranked from poorest to richest.

• Vertical axis (Y-axis): Cumulative percentage of total income or wealth received or owned.

These axes show how income or wealth is distributed across the population.

What does the diagonal straight line on a Lorenz Curve represent?

perfect equality in income or wealth distribution.

This means each percentage of the population receives the same percentage of total income or wealth.

For example, the poorest 20% of the population would receive 20% of total income.

How does the Lorenz Curve demonstrate income or wealth inequality?

The further the Lorenz Curve bends away from the diagonal line of perfect equality, the greater the inequality.

• Closer to the diagonal: More equal distribution.

• Further from the diagonal: More unequal distribution.

This allows economists to compare inequality between different populations or periods.

How does the Lorenz Curve show the difference between income and wealth inequality?

Separate Lorenz Curves can be used to illustrate income and wealth distribution.

In Australia's 2017–18 data:

• The income Lorenz Curve (blue) was closer to the line of equality.

• The wealth Lorenz Curve (crimson) was further from the line of equality.

This indicates that wealth was distributed more unequally than income.

What is the Gini Index?

A measure of inequality in the distribution of income or wealth.

It is calculated using the areas between the Lorenz Curve and the line of perfect equality.

Gini Index = A ÷ (A + B)

Where:

• A: Area between the line of perfect equality and the Lorenz Curve.

• B: Area beneath the Lorenz Curve.

Why can two countries with the same Gini coefficient have different levels of income equality in practice?

The Gini coefficient summarises inequality into a single value, meaning different patterns of income distribution can produce the same result.

One country may distribute income across more of its population, while another concentrates income among fewer people.

This means the Gini coefficient should be considered alongside other measures of income distribution

Outline 3 reasons or explanations for wealth inequality in Australia

• personal traits (innate personality and talent, attitude to risk, skills); 

• occupational conditions (e.g. education, training, work responsibility, hours worked, degree of danger, geographical location); 

• opportunity (e.g. socio-economic and family background); 

• other factors (e.g. sickness or disability, age, involuntary unemployment, 'luck'). 

Define indirect benefits

the additional positive effects gained from an economic activity that are not the main or immediate benefits.

Example: Education increases a person's income (direct benefit), but also improves productivity and contributes to economic growth (indirect benefits).

Explain how the Gini coefficient is calculated and how it can be used to measure the degree of income inequality in an economy.

The Gini coefficient measures income inequality using the Lorenz Curve.

• Calculation: The area between the line of perfect equality and the Lorenz Curve is divided by the total area beneath the line of perfect equality.

• 0: Perfect income equality, where everyone earns the same income.

• 1: Absolute income inequality, where one person receives all income.

• Closer to 1: Greater income inequality.

• Closer to 0: Greater income equality.

Outline 3 reasons why the public sector has grown so much in Australia over the long term

• crises such as war and recession brought about growth in government responsibilities and spending 

• the government has taken a more interventionist approach in the management of the economy in the last fifty years 

• the government has ventured into areas of service provision that are now seen as worthwhile in a wealthy economy, examples being the National Broadband Network (NBN); The National Disability Insurance Scheme (NDIS); increased education spending under the Gonski model, and increased border protection.  

State 3 tiers of government

National (Federal) Government

• Responsibilities: Defence, foreign affairs, international trade, banking regulation and welfare.

• Funding: Over 90% comes from taxes on personal income, company profits and certain goods.

State/Territory Governments (8 in Australia)

• Responsibilities: Law and order, healthcare, education and transport.

• Funding: Mainly federal government transfers and state taxes (payroll, land, stamp duty and vehicle taxes).

Local Governments

• Responsibilities: Urban planning, rubbish collection and maintaining parks and gardens.

• Funding: Mainly council rates paid by landowners, plus federal and state grants.

State the key element of income redistribution for a government

The government redistributes income through direct taxation and government spending.

• Direct taxation: Collects taxes on income to fund government services and support.

• Government spending: Redistributes income through transfer payments, such as pensions and welfare benefits.

• Transfer payments: Provide financial support to the elderly, unemployed, sick, disabled and families.

Key point: Social security and welfare account for approximately 35–40% of Commonwealth Government spending.

List the 5 highest sources of government revenue in order from highest to lowest

• Personal income tax – $357.8 billion

• Company and resources rent taxes – $145.5 billion

• Goods and Services Tax (GST) – $99.3 billion

• Non-tax revenue – $56.0 billion

• Excise and customs duties – $43.8 billion

Explain how the government uses its spending powers to redistribute income

The government redistributes income through:

• Direct transfer payments: Providing financial support through pensions, unemployment benefits and welfare payments to low-income and disadvantaged groups.

• Indirect government payments: Subsidising essential services such as healthcare, education and housing to make them more affordable.

List the 4 highest areas of government spending in order from highest to lowest

• Social security and welfare – 37.0%

• Health – 15.9%

• Education – 6.9%

• Defence – 6.6%

Explain how the government uses indirect payments to redistribute income

The government redistributes income by subsidizing essential services such as healthcare, education and housing.

• These services are provided at reduced costs, making them more affordable.

• This helps low-income households access services they may otherwise be unable to afford.

What is the role of the taxation system within the economy

• it helps to redistribute income from the wealthy to the poor 

• it influences how resources are allocated among competing uses 

• it helps to regulate the economic fluctuations associated with the business cycle 

Explain how the burden of a tax can be shifted from producers to consumers.

Producers may increase the price of goods to pass the tax onto consumers.

Example: If an excise duty is imposed on soap:

• Impact: Producers pay the tax to the government.

• Incidence: Consumers bear the burden if producers pass the full tax on through higher prices.

What is direct taxation?

Direct taxation is collected from an individual’s or company's income.

• The impact and incidence of the tax fall on the same person.

• Example: Personal income tax and company tax.

What is indirect taxation?

Indirect taxation is collected through consumer spending on goods and services.

• The impact and incidence may fall on different people.

• Examples: GST and excise duties.

What is progressive taxation?

Progressive taxation takes an increasing proportion of income as income increases.

• Higher-income earners pay a greater percentage of their income in tax.

• Example: Personal income tax in Australia.

What is regressive taxation?

Regressive taxation takes a decreasing proportion of income as income increases.

• Lower-income earners bear a greater tax burden relative to their income.

• Example: GST on goods and services.

Explain why GST is considered a regressive tax.

GST is considered regressive because everyone pays the same tax rate on a taxable product, regardless of income.

• Lower-income earners spend a greater proportion of their income on the tax.

• Example: A 10% GST on chocolates costs everyone the same amount, but represents a larger percentage of a low-income earner's income.

What is proportional taxation?

Proportional taxation takes a constant proportion of income, regardless of how much is earned.

• Everyone subject to the tax pays the same percentage.

• Example: Australia's standard company tax rate of 30% on taxable profits, regardless of the company's profit level.

What are the three characteristics of a good tax system?

A good tax system should be:

• Fair: Everyone pays their fair share of taxes.

• Simple: Easy to understand and comply with.

• Efficient: Inexpensive and easy to administer and collect.

What is simplicity in a tax system?

Simplicity means the tax system should be easy to understand and follow.

• Minimises complicated forms, rules and filing requirements.

• Reduces the cost of complying with tax obligations.

What is efficiency in a tax system?

Efficiency means the tax system should be easy and inexpensive to administer and collect.

• Rules and forms should be straightforward.

• Taxes should be collected accurately and on time.

• The cost of collecting taxes should be low compared to the revenue collected.

What is personal income tax?

Personal income tax is a tax imposed on an individual's wages and salary income.

• It is a direct tax, meaning the impact and incidence fall on the same person.

• It is a progressive tax, meaning higher-income earners pay a greater proportion of their income in tax.

What is a marginal tax rate?

The marginal tax rate is the percentage of tax paid on the next dollar of taxable income earned.

• Marginal tax rates increase as income increases.

• Only the income within each tax bracket is taxed at that bracket's rate.

What is Fringe Benefits Tax (FBT)?

Fringe Benefits Tax is a tax on the value of non-cash benefits provided to employees as part of their salary package.

• Examples: Company cars, school fees, low-interest loans and gym memberships.

• FBT is paid by the employer and is generally taxed at the highest marginal tax rate (47%, including the Medicare levy).

What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit made from selling an asset, such as shares or investment properties.

• Capital gains are generally included in taxable income.

• They are taxed at the individual's marginal income tax rate.

What is the Goods and Services Tax (GST)?

GST is a 10% indirect tax applied to most goods and services consumed in Australia.

- Some goods and services are GST-free, meaning no GST is charged.

How is GST revenue distributed in Australia?

GST revenue is collected by the federal government and distributed to state and territory governments.

- It is therefore considered an important source of state and territory revenue.

What are excise duties?

Excise duties are indirect taxes imposed on certain goods produced domestically in Australia.

• Examples: Alcohol, cigarettes, petrol, diesel and LPG.

• Generally charged at a fixed rate per unit of the product.

Why do excise duties generate significant government revenue?

Excise duties are often imposed on goods with price-inelastic demand.

• Consumers are less responsive to price increases.

• Quantity demanded decreases proportionally less than the price increases, allowing the government to collect substantial revenue.

What are the two main purposes of excise duties?

• Raise government revenue: Generate income to fund government spending.

• Reduce negative externalities: Discourage consumption of goods that create social costs, such as cigarettes and alcohol.

What is customs duty?

Customs duty is an indirect tax imposed on imported goods, also known as a tariff.

- Purpose: Raises government revenue and can protect Australian producers from overseas competition by making imported goods more expensive.

What is company tax?

Company tax is a proportional tax imposed on a company's taxable profits.

• Impact: Falls on the company paying the tax.

• Incidence: May fall partly on consumers if companies pass the cost on through higher prices.

What are resource rent taxes (RRT)?

Resource rent taxes are taxes imposed on profits (economic rents) generated from extracting natural resources, such as minerals.

- Aim to ensure that some profits from non-renewable resources are returned to the public.

What is economic growth?

Economic growth is the increasing capacity of an economy to satisfy the material wants of its population.

What is full employment?

Full employment occurs when everyone willing and able to work can find employment.

• It does not mean zero unemployment.

• Some frictional and structural unemployment will always exist.

Why is zero unemployment impossible?

Because some unemployment naturally occurs due to:

• Frictional unemployment: Workers temporarily searching for jobs.

• Structural unemployment: Workers' skills not matching available jobs due to changes in the economy.

What is the natural rate of unemployment?

The natural rate of unemployment is the unemployment rate that exists when the economy is operating at full employment.

• Includes frictional and structural unemployment.

• Estimated at approximately 4.5% in Australia in the study material.

What is cyclical (demand-deficient) unemployment?

Cyclical unemployment occurs when economic growth slows and demand for goods and services decreases.

• Businesses reduce production and employment.

• Unemployment rises above its natural rate during economic downturns.

What is price stability?

Price stability refers to maintaining a low and stable inflation rate over the business cycle.

- Australia's inflation target is 2–3% over the course of the business cycle.

Why is price stability important?

Price stability is important because high inflation can:

• Reduce real income: Decreases the purchasing power of households and businesses.

• Reduce international competitiveness: Makes Australian goods more expensive.

• Distort income distribution: Affects some income groups more than others.

• Reduce economic efficiency: Distorts the allocation of resources.

• Reduce investment and economic growth: Creates uncertainty for businesses.

Why is zero inflation neither achievable nor desirable?

Prices naturally change due to demand and cost pressures in the economy.

• Some inflation is normal and expected.

• The government aims to maintain low, stable inflation rather than zero inflation.

What is income distribution?

Income distribution refers to how an economy's total income is spread among different individuals and socio-economic groups.

How does the Australian Government achieve a more equitable distribution of income?

The government improves income equality through:

• Progressive taxation: Higher-income earners pay a greater proportion of their income in tax.

• Transfer payments: Government payments such as pensions and unemployment benefits support lower-income groups.

• Social welfare programs: Help improve fairness and living standards.

What is the efficient allocation of resources?

The efficient allocation of resources occurs when resources are used to produce the goods and services people want at the lowest possible cost.

How does the government improve economic efficiency?

The government improves efficiency by:

• Correcting market failure: Supporting public and merit goods, such as education and healthcare, and addressing externalities.

• Promoting competition: Reducing monopoly power.

• Increasing productivity: Encouraging education, training and investment in capital equipment.

Which government agencies promote economic efficiency in Australia?

• Productivity Commission: Advises on improving productivity and economic efficiency.

• Australian Competition and Consumer Commission (ACCC): Promotes competition and protects

What is productivity, and why is it important for economic growth?

Productivity measures the amount of output produced per worker.

• Improved through education, training and capital equipment.

• Higher productivity allows more goods and services to be produced with the same resources.

• It is a key driver of long-term economic growth.

Define the term ‘impact’ in relation to a tax.

It refers to the person or business on whom the tax is initially imposed and who is legally responsible for paying it to the government.

Define the term ‘incidence’ in relation to a tax

It refers to the person or business who ultimately bears the financial burden of the tax, regardless of who initially pays it to the government.

Define what is meant by ‘direct’ taxation and give an example

It refers to taxes imposed directly on an individual's or business's income or wealth and paid to the government.

Example: Personal income tax, which is deducted from an individual's earnings.

Explain what is meant by ‘indirect’ taxation.

It refers to taxes imposed on the purchase of goods and services, rather than directly on income or wealth.

Example: Goods and Services Tax (GST), which is included in the price of many goods and services in Australia.

In relation to what makes a good tax system, explain what is meant by the term ‘fairness’

Fairness in a tax system means that the tax burden is distributed equitably among taxpayers, based on their ability to pay.

This means individuals with higher incomes should generally pay more tax than those with lower incomes, ensuring the tax system does not place an unfair burden on disadvantaged households.