The Distribution of Income Objectives
Expert reviewed • 14 August 2024 • 11 minute read
What is the Distribution of Income?
The distribution of income is a fundamental objective of economic policy, aiming to ensure that the wealth generated by an economy is fairly distributed among its citizens. This objective addresses economic inequality and seeks to promote social equity and stability. Before reading this chapter, it is best to look at the chapter on the Distribution of Income and Wealth, to have a better understanding of the concepts presented below. Additionally, read the chapter on analysing the Lorenz Curve to assist you with your understanding of the distribution of income and wealth in an economy.
What is the Importance of Income Distribution?
The Australian government focuses on equally distributing income across the economy for the following reasons:
- Promoting social equity through fair income distribution helps reduce disparities and ensures that all individuals have access to a decent standard of living. This fairness is imperative for social cohesion, and reducing tensions and conflicts that can arise from perceived or actual injustices relating to income distribution.
- A more equal distribution of income can lead to stable consumer demand. This is because it allows a broader base of the population to have the purchasing power to buy goods and services. When income is more evenly spread, it prevents excessive concentration of wealth, which can lead to economic imbalances and financial instability. Stable consumer demand supports sustainable economic growth and reduces the likelihood of economic downturns.
- Equitable income distribution affects opportunities for individuals to improve their economic status. When income is distributed more equally, people have better access to education, training, and employment opportunities, enabling them to climb the economic ladder. This enhances social mobility and reduces the entrenchment of poverty across generations.
- Income distribution significantly impacts access to essential services such as healthcare and education. More equitable income distribution ensures that a larger portion of the population can afford quality healthcare and education, leading to better overall health and educational outcomes.
- Extreme income inequality can lead to social unrest and political polarisation, threatening the stability of the political system. By focusing on equitable income distribution, the government can reduce the risks of civil unrest, protests, and political instability.
What are the Challenges in Addressing Income Distribution?
Several factors complicate efforts to achieve a more equitable income distribution:
- International competition can pressure wages in certain sectors, leading to job losses and wage stagnation. For example, manufacturing jobs in Australia declined by 12% between 2011 and 2021 due to increased competition from countries with lower labour costs. This sectoral shift can exacerbate income inequality as affected workers struggle to find equivalent employment.
- Automation and artificial intelligence (AI) can displace lower-skilled workers, increasing unemployment and income disparity. Projections suggest that up to 46% of Australian jobs are at risk of automation by 2030 (OECD). This technological disruption disproportionately affects those with lower skill levels, widening the income gap between high and low-skilled workers.
- Free market dynamics can lead to a concentration of wealth among a small segment of the population. In Australia, the wealth share of the top 1% increased from 15% in 2012 to 23% in 2022. This concentration of wealth can result in greater economic power and influence for a few, increasing income inequality and limiting economic opportunities for others.
- The complexity of the tax system, including loopholes and exemptions, can disproportionately benefit higher-income groups. Tax evasion and avoidance by high-income individuals and corporations can undermine the effectiveness of Australia's progressive taxation system. For example, multinational corporations using tax havens to minimise tax liabilities can significantly reduce government revenue, limiting the funds available for redistribution and social programmes aimed at reducing inequality.
What Policies are Used to Address Income Distribution?
Australian policymakers employ various strategies to influence income distribution:
Progressive Taxation
Progressive taxes impose higher rates on higher income brackets, reducing income inequality by redistributing wealth. Australia's tax system is progressive, with marginal tax rates increasing with income levels, ranging from 0% to 45% for the 2023-24 period. The top marginal tax rate is 45% for incomes over AUD 190,000. Additionally, most taxpayers pay a Medicare levy of 2%. This allows the government to collect revenue and spread it to lower-income earners in the economy, through the form of welfare payments.
Social Security System
Social welfare programmes provide financial assistance to low-income individuals and families, helping to reduce poverty and inequality. For example, Australia's JobSeeker Payment offered $745.20 per fortnight to unemployed individuals during the COVID-19 pandemic, ensuring they have a basic income while seeking employment. Additionally, the Age Pension provides a maximum rate of $27,664 per annum for singles as of 2023, supporting older Australians in maintaining a decent standard of living.
Public Services and Education
Australian investment in public services such as healthcare, education, and housing can help level the playing field and provide opportunities for upward mobility. For example, Australia's Medicare system offers free or subsidised healthcare, reducing the burden on low-income families. Free primary and secondary education, along with subsidised tertiary education through the Higher Education Loan Program (HELP), ensures financial constraints do not hinder access to education. Additionally, the National Housing and Homelessness Agreement (NHHA) provides affordable housing options.