Income Distribution and the Gov in the Macroeconomy

Income and Wealth

  • Income: flow of money received over a period of time (e.g. wages, rent, dividends, welfare payments).

  • Wealth: stock of assets owned at a point in time (e.g. property, savings, shares, superannuation).

  • Key difference: income is earned or received regularly, while wealth is accumulated and can generate future income.

  • Wealth inequality is generally greater than income inequality because assets accumulate and appreciate over time.

Measurement of Income and Wealth Distribution

Lorenz Curve

  • Graph showing the cumulative percentage of income (or wealth) received by cumulative percentages of households.

  • The further the curve bends away from the 45° line of equality, the greater the inequality.

Gini Coefficient

  • Numerical measure of inequality derived from the Lorenz Curve.

  • Ranges from 0 (perfect equality) to 1 (perfect inequality).

  • In Australia:

    • Income Gini (after tax & transfers): ~0.31

    • Wealth Gini: ~0.61

  • Used to compare inequality over time and between countries (OECD average ≈ 0.32 for income).

Commonwealth Government Revenue and Spending

Revenue (approx. $640 billion in 2024–25)

  • Main sources:

    • Personal income tax (~45% of revenue)

    • Company tax (~20%)

    • GST (~14%)

    • Excise and customs duties (fuel, alcohol, tobacco)

    • Non-tax revenue (e.g. government enterprises, fees)

Expenditure (approx. $670 billion in 2024–25)

  • Main areas:

    • Social security and welfare (~36%)

    • Health (~17%)

    • Education (~8%)

    • Defence (~6%)

    • Infrastructure, public debt interest, and other services

  • Fiscal policy decisions reflect macroeconomic priorities (e.g. stimulus during downturns, restraint during inflation).

Types of Taxation

Direct vs Indirect

  • Direct tax: paid straight to the government by the individual or firm (e.g. income tax, company tax).

  • Indirect tax: levied on goods/services and paid via sellers (e.g. GST, excise).

Progressive / Regressive / Proportional

  • Progressive: higher-income earners pay a larger percentage (e.g. income tax).

  • Regressive: lower-income earners pay a larger share of income (e.g. GST).

  • Proportional: everyone pays the same rate (e.g. company tax at 30%).

Taxes on Income vs Expenditure

  • Income taxes: based on earnings (personal, company).

  • Expenditure taxes: based on spending (GST, excise).

Types of Commonwealth Taxes

  • Personal income tax: main revenue source; progressive rates up to 45%.

  • Company tax: 30% for large companies, 25% for small–medium enterprises.

  • Goods and Services Tax (GST): 10% on most goods and services; regressive in impact.

  • Excise duties: taxes on specific goods (fuel, alcohol, tobacco); used for both revenue and discouraging consumption.