U202 Distribution of Income and Wealth Flashcards
Earned income
Earned income Comes from households selling their labour or supplying intellectual talents and physical power to businesses
unearned income
Unearned income (aka passive income) Includes rent and interest. It is received for allowing others to use your property or savings, or sometimes it represents a reward for risk.
gross income
Gross Income: The sum of all incomes received
disposable income
Disposable Income: Gross income minus taxes and other essential living expenses i.e money left available for spending
transfer income
Transfer Income: Money from welfare payments and cash benefits from government for nothing in return
fringe benefits
Fringe benefits: Goods/services received in lieu of money eg free house/car etc
Equivalised Household Income
Equivalised Household Income (EHI): Income adjusted to account for household size and composition
Eg EHI would be different for someone living alone vs someone with a family of 4, despite same income.
how is wealth measured
Wealth is measured by the “assets” that are owned, such as property, cars, belongings, investments and cash/savings, as well as income.
relo b/n income and wealth
(Earned) income is used to buy assets (wealth)
And;
Wealth is utilised to provide (unearned) income through renting/leasing/interest/dividends/return from investments etc
The goal of most rich people: End up with more unearned income and less earned income
i.e retire early/no need to work anymor
income distribution
Income distribution refers to the way the income ‘cake’ is shared or divided between individuals, genders, groups or regions.
what does income distribution affect
This pattern of distribution affects living standards and may be fairly even (i.e each group shares the same proportion of the cake) or uneven.
lorenz curve
The Lorenz curve is a graphical representation of the distribution of income or wealth in a society.
A straight line = absolute equality.
The further the line curves from the straight line, the larger level of inequality
gini coeffcient
Gini Coefficient: a number between 0 and 1 that indicates the level of equality in the income distribution using this formula:
how does the gini coefficient measure inequality
The larger the Gini Coefficient, the greater the inequality in income distribution
i.e.
Gini Coefficient of 1 would imply there is total inequality in income distribution
Gini Coefficient of 0 would imply total equality in income distribution
what gini coefficient is ideal
In Australia, a Gini Coefficient of 0.3-0.4 is seen as ‘ideal’
how else does the ABS measure inequality
Apart from measuring income inequality by quintile, the ABS also measures other aspects of income distribution.
inequality:
by state/territory
by gender
by occupation
intergenerational
What is the relationship between consumption and living standards?
Increasing fair distribution of income and wealth for those in poverty will increase consumption per capita in a nation, which will improve a nation’s overall living standards
Is Income Inequality an important issue to address? Why or why not?
addressing income inequality is crucial because it affects social stability, economic growth, and overall well-being. High inequality can lead to social unrest, limit access to education and healthcare, and reduce social mobility.
inequality is bad
Impact on Society:
Impact on Society:
Poverty and inequality creates a social divide
This reduces cohesion with society
This erodes society’s non-material wellbeing overall
inequality is bad
Impact on Productivity:
Impact on Productivity:
Poverty and inequality leads to poorer educational and health outcomes,
This lowers efficiency of labour resources
This lowers potential output, incomes and prosperity
This stops firms gaining economies of large-scale production and slows economic growth
inequality is bad
Impact on Economic stability (part 1)
Impact on Economic stability (part 1)
High income earners have larger impacts on spending on the economy than lower income earners
For example, if they spend less of their income, their impact on slowing down the economy is greater
Governments could try to encourage spending by lowering interest rates.
But this increases demand for things such as housing, causing prices to rise (inflation).
inequality is bad
Impact on Economic stability (part 2)
Lower income earners now have to pay more for rent and mortgages.
Governments could try to rein in this inflation by increasing interest rates (thus reducing demand)
But this causes more unemployment and higher mortgage costs, causing low income earners to struggle even more or even default on their mortgage payments
inequality is bad
Impact on what is produced:
Inequality causes market failure due to the underproduction of socially beneficial and necessary goods and services
This is due to lower incomes with less spending power being excluded from market decisions
While those who have higher incomes spend more (i.e contribute more in market demand
inequality is bad
Impact on what is produced 2:
Impact on what is produced:
As a result they distort the allocation of resources through overproducing luxury goods and services such as cars, yachts and high-end housing
At the same time, they underproduce necessities like affordable healthcare, housing, education, public transport and legal services, unless there is government interference
inequality is good
Impact on productive efficiency:
Impact on productive efficiency:
Inequality may increase incentive to work harder, improving efficiency. This boosts productive efficiency, productivity and economic activity
Increases incentive to gain improved skills, education and job position, potentially escaping the poverty cycle and improving employability, higher incomes and improved living standards
inequality is good
Impact on population distribution
Increases the incentive to relocate to another geographic area to meet labour shortages, reducing urbanisation, supporting rural areas and lifting overall living standards
inequality is good
Impact on innovation and growth
increases incentives for businesses to take risks and expand their operations and encouraging innovation. This boosts productive efficiency, productivity and economic activity
Increases the levels of savings needed to finance higher levels of investment (i.e more money from high income earners gets saved in bank than if it was evenly distributed, benefiting even the poor in their business investments)
Rewards households and individuals who are successful, creating incentives to work hard to achieve higher incomes
- Progressive Income Tax system
Progressive tax system on personal income that taxes higher income earners more and lower income earners less.
They take money from the wealthy that can then potentially be used to pay for welfare and free or subsidised public services.
In response to the criticisms that the proposed system was not as equitable as it could be, the Albanese Government modified the tax changes.
- Proportional Tax System
Direct taxes where the tax is the same proportion of the income regardless of the amount.
Eg; Proportional tax on business income where all companies pay the same rate of tax on all profits. Eg company tax is 25-30% of all profits
These have a fairly neutral effect on the distribution of income as not all high income earners are business owners.
- Regressive (Indirect) Tax system (and exemptions)
- Regressive (Indirect) Tax system (and exemptions)
Indirect taxes are same level of taxes on goods and services that everyone pays, regardless of income level (e.g. the GST, excise taxes on petrol, alcohol and tobacco, the former carbon tax)
These are mostly regressive and actually increase inequality, because lower income earners would pay a higher proportion of their income than higher income earners.
To fix this issue, necessities are exempted or the taxes are only levied on luxury items purchased mainly by higher income earners.
- Cash Benefits
- Cash Benefits
Cash benefits (eg disability, welfare, AusStudy,
NewStart, pension, family tax benefits).
These are Means tested: those with high enough assets/income cannot receive them
This increases disposable income of most needy.
Amount provided needs to be balanced: Too litle is not enough;
Too much gives less incentive to work ones way out of poverty
- Free/subsidised services
- Free/subsidised services
The budget is also used to fund and provide free or subsidised government services (e.g. merit goods and services like public health, education, housing, transport) to the needy at an affordable price, improving their accessibility.
- Retirement Funding (Superannuation)
- Retirement Funding (Superannuation)
The government encourages superannuation or retirement savings.
Currently all employers must contribute an additional 10.5 per cent of employees’ wages into a superannuation fund on behalf of each employee.
This should allow people to retire with more wealth and income, reduce their reliance on the pension (and budget from taxes) and enjoy improved access to goods and services.
- Economic Stabilisation (Targeted Unemployment & Inflation Rate)
The government tries to lower unemployment and keep inflation in check (i.e economic stabilisation) using appropriate budgetary policies such as taxation & changing their spending
By keeping unemployment and inflation rates lower, the purchasing power of family incomes and general living standards are better protected. Equity is improved.
- Minimum Wage
- Minimum Wage
Through the Fair Work Commission, the government also sets the minimum wage to ensure that
low-paid workers have reasonable wages,
are not exploited and
can have access to basic goods and services.
- Antidiscrimination Laws
- Antidiscrimination Laws
The government has also passed anti-discrimination laws to increase fairness when people apply for jobs, so that their age, gender and race do not prevent them from gaining employment or seeking promotion.
