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?)