Redistribution of income

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Information about Redistribution of income

Published on March 18, 2009

Author: mshirlaw



Year 11 economics

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 50 45 40 % of total 35 Private Income 30 Taxes 25 Benefits 20 Final Income 15 10 5 0 Lowest Second Third Fourth Highest 20% 20% Quintile

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?)

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