Income Distribution

Question 1

What do people pay tax on

Answer 1

• Paid Employment
• Income received from trusts
• Investment incomes
• Capital gains
• Welfare payments
• Foreign income

Question 2

What type of tax is personal income tax

Answer 2

Personal income tax is classified as a direct tax, because it is deducted from the taxpayer’s weekly or monthly wage or salary and sent directly to the tax office.

Question 3

In general, what are indirect and direct taxes imposed on

Answer 3

Indirect taxes are imposed on expenditure, while direct taxes are imposed on income

Question 4

What is income tax

Answer 4

Income tax is progressive in nature. This means that as people earn a higher income, they pay a higher proportion of that income as tax.

In Australia income tax brackets are used which means that each time the tax bracket increases the marginal rate of tax also increases.

Question 5

What is proportional tax

Answer 5

Proportional tax is where the rate of tax remains the same as income rises. E.g. company tax

Question 6

What is regressive tax

Answer 6

Regressive tax is where the rate of tax falls as income rises. E.g. excise tax levied on an item. Person with lower income is higher proportion of their income, so they take more of the burden.

Question 7

What is income

Answer 7

Income is the flow of funds.

Question 8

What is wealth

Answer 8

Wealth, on the other hand, refers to the current value of the assets a household has accumulated over time through savings; financial investments; business dividends; and inheritance.

Question 9

How is income and wealth interrelatedd

Answer 9

Wealth and income are interrelated as more income a household has, the greater its capacity for building wealth over time.

Question 10

What is absolute poverty

Answer 10

Absolute poverty is a situation ni which people live below a subsistence level of income.

Question 11

What is the lorenz curve

Answer 11

Lorenz curve maps the cumulative proportion of the population, ranked by income, against their cumulative share of income.

X-axis is in relation the % income on the society.
Y-axis is the relation of % population in society.

Question 12

how does the lorenz curve show incoem inequality

Answer 12

Whenever some degree of income inequality exists, the Lorenz Curve will bow outwards, moving south-east of the diagonal line. The further the curve lies from the diagonal, the greater the inequality of the distribution of income

Question 13

What is the formula for the gini coefficient

Answer 13

area between perfect equality lorenz and actual lorenz / area under perfect lorenz

Question 14

Characteristics of Gini coefficient

Answer 14

The larger the gini coefficient, the higher the level of degree inequalit.
A country with gini coefficient of = 0 has perfect income distribution.

Absolute inequality, on the other hand, would yield a Gini coefficient of 1.

Question 15

Possible explanations for income inequality

Answer 15

• personal traits (physical characteristics; personality and talent
• attitude to risk-taking; knowledge and skills) occupational conditions (required education and training, work responsibility; hours worked; presence of danger; geographical location);
• opportunity (socio-economic and family background, access to higher education); and
• other factors (for example, sickness; disability; age; involuntary unemployment; and ‘luck’)

Question 16

What is income redistribution

Answer 16

Income redistribution is when money is taken from the rich and given to the poor to achieve the level of acceptable standard of living. Progressive tax is used by the government, as it makes rich pay more tax while the poor pay less. the government may also use its spending powers such as direct transfer payments.

Question 17

What is indirect transfer payments

Answer 17

Social transfer in kind (goverment provides goods or services to households) also redistribute income

Question 18

What are the key macroeconomic objectives

Answer 18

1. Full employment
2. Sustainable economic growth
3. Price stability

Question 19

What is full employment

Answer 19

Full employment occurs when everyone who is willing to work can find employment. This does not mean a ‘zero’ rate of unemployment. Rather, the objective is to achieve a rate of unemployment consistent with the natural rate of unemployment - currently around 4 per cent of the workforce.