Income Distribution

Question 1

Absolute poverty

Answer 1

-absolute poverty means that your income is below substisence level
-absolute poverty $2USD per day
-very few Aus in absolute poverty

Question 2

Relative poverty

Answer 2

-means your income cannot afford you the minimum standard of living in your society
-relative poverty line=half the median income
-Aus 20% live in relative poverty (less than $489 a week after tax)

Question 3

Income distribution

Answer 3

-is the smoothness or equality with which income is dealt out among members if a society. If everyone earns the exact same amount of money, then income distribution is perfectly equal.
-measured by Lorenz curve and Gino coefficient

Question 4

Reasons for Aus inequality

Answer 4

-a number of explanations can be offered for the apparent inequality in income and wealth in the Aus economy, these include:
-personal traits (talent, personality, attitude to risk, skills)
-occupational conditions (education + training, hours worked, location, degree of danger)
-opportunity (socio-economic + family background)
-other factors (sickness, disability, age, involuntary unemployment, ‘luck’)

Question 5

The modified market economy

Answer 5

-economic system based on private ownership of resources, free enterprise, and the operation of markets
-also features gov intervention to provide resources regarded as essential to regulate econ activity, and redistribute income

Question 6

Merit goods

Answer 6

-private goods associated with positive externalities. Gov can intervene and supply merit goods or boost consumption and increase economic benefits e.g social housing

Question 7

Government regulations:

Answer 7

-direct regulations: set down as laws / compilations
-indirect regulations: based on incentive e.g subsidies and taxes

Question 8

Taxation principles

Answer 8

-simple for taxpayers to understand/calculate;ate, equitable horizontally + vertically and efficient

Question 9

Income + wealth

Answer 9

-income = flow of funds such as wages
-wealth = stock of financial assets
-usually a string correlation between income and wealth - higher income allows greater wealth to be accumulated overtime
-both distributed unevenly

Question 10

The Lorenz curve and gini coefficient

Answer 10

-Lorenz curve maps cumulative proportion of population, ranked by income, against their cumulative share of income.
-horizontal axis = proportion of population (cumulative)
-vertical axis = proportion of income (cumulative)
-inequality bows curve outwards
-gini coefficient, area between line of equality and Lorenz curve
-gini of 0 = perfect equality
-gini of 1 = perfect inequality
-aim for around 0.35

Question 11

Income redistribution methods:

Answer 11

-income redistribution in Aus is achieved primarily by a progressive tax system and a system of cash and in-kind benefits
-tax revenue raised is used to supplement the private income of people in 1st income quintile (lowest 1/5 earners)
-supplemented considerably by direct cash transfer payments such as pensions and welfare payments, indirect gov payments which subsidise the cost of public services such as education, housing and health

Question 12

Economic policy objectives of gov

Answer 12

-econ growth 2-4%
-price stability 2-3%
-full employment 4-5%
-efficient allocation of resources
-equitable distribution income

Question 13

Fiscal policies

Answer 13

Adjusting gov budget (tax revenue + gov spending) to either leak/inject economy

Question 14

Monetary policies

Answer 14

Adjusting central interest rate (cash rate) to make it either more/less expensive for firms + consumers to borrow money

Question 15

Gov budget - revenue

Answer 15

-income tax (50%)
-company
-GST
-excise

Question 16

Gov budget - spending

Answer 16

-social security + welfare -> gov spends the most
-health
-education
-defence
-general public services

Question 17

The role of gov

Answer 17

-most national economies= modified market systems
-based on private ownership BUT some gov interventions to improve outcome
1) redistribution of income
2) regulation of business
3) macro economic management

Question 18

Government and private goods

Answer 18

-gov does provide private goods such as power, water and roads
-these goods could be sold by private companies as there is a profit incentive
->they often involve expensive infrastructure
->they would often be monopolies (unfair competition)

Question 19

Public and merit goods

Answer 19

-some essential goods would be underprovided if left to private sector as no profit incentive
-applies to both public and merit goods
-e.g. police, defence (public) housing, education, health (merit)

Question 20

Business regulation

Answer 20

-regulations used to improve outcomes e.g
->rules and regulations that cover access to common resources such as fishery
->business activity -direct means such as standards licensing and indirect such as taxes and subsidies

Question 21

Income redistribution

Answer 21

-Centrelink, healthcare, housing, education, digital services
-in free market economy, come people would be unlikely to achieve an acceptable standard of living
-gov uses taxing and spending powers to redistribute income from higher income earners to lower income earners

Question 22

Macroeconomic management

Answer 22

-a strong economy features econ growth, low unemployment with moderate inflation
-gov applies fiscal and monetary policies to reduce the impacts of the business cycle in the short term

Question 23

The size of gov sector

Answer 23

-in Aus the gov sector (federal, state and local tiers)
->employs around 2 million
->produces about 20% GDP
->owns between 15-20% of businesses in the transport and construction, electricity and power provision services
-also undertakes public service and regulatory functions at each level each tier having different responsibilities

Question 24

Australia’s taxation system

Answer 24

-taxation plays an important role in
->raising revenue for gov and society
->redistribution of income + wealth from the wealthy to the poor
->influencing how scarce resources are used among competing users
->regulating econ fluctuations (business cycle)
-92% of commonwealth gov income is raised by firms of taxation

Question 25

How taxes are levied

Answer 25

-progressive = like income tax claim a higher proportion of income depending on earnings
-proportional= like company tax claims a constant proportional of income at any level
-regressive= like a sale tax places a greater burden on low income earners

Question 26

Impact vs incidence

Answer 26

-where tax is levied vs the burden of the tax
-impact = who makes it
-incidence = who pays it

Question 27

Company tax

Answer 27

-basic principle is that a company pays tax on its accounting profits
-proportional - current rate is 30% of profit
-paid quarterly - amounts to around 4.5% GDP

Question 28

Indirect taxes

Answer 28

-excise tax is payable on sales of alcohol, tobacco, fuel products
-raise revenue for the gov, also intended to reduce consumption on harmful products / revive externalities
-excise taxes are indirect and regressive
-GST is a broad base indirect tax (10%) collected by federal gov

Question 29

Tax reform

Answer 29

-over 40 years Aus has carried out some tax reforms such as
-introducing CGT in 1985 (increased vertical equity)
-a fringe benefits tax (FBT-1986)
-GST (2000)
-self assessment of income tax

Question 30

Direct vs indirect

Answer 30

-levied on income vs levied on expenditure
-direct = from income
-indirect = from spending

Question 31

VERTICAL/HORIZONTAL EQUITY

Answer 31

-vertical: workers who earn higher incomes should pay more tax
-horizontal: those who earn similar wages should pay same rate of tax