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The Redistributional Effect of Personal Income Tax in Australia
14
Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
THE REDISTRIBUTIONAL EFFECT OF PERSONAL INCOME TAX IN AUSTRALIA T. M. Alchin Lecturer in Economics University of Wollongong INTRODUCTION
The purpose of this paper is to show that the progressive income tax in Australia has achieved some equity in terms of income redistribution by personal income taxation. There are many redistributional aspects associated with the actions and policies of governments. For example. public education is primarily a redistrib~tion of income (rom the wealthy to the poor. from small families to large ones and from older to younger generations. Debate also centres on whether the redistribution should be in terms of public goods, cash benefits or progressive income taxes. This study aims to refute the argument that has been expressed that the progressive incpme tax system has failed to achieve any equity through redistribution of income. Data examined in this study show that annual levelling of incomes has occurred through taxation especially in the last decade. It is not the purpose of this paper to argue whether the primary (or pre-tax) income distribution is more equitable in 1979-80 than in 1950-51. Rather comment is made on what can be established in terms of the incidence or redistributive imp'act of income tax, i.e. whether the secondary (or post-tax) income is more equitable than the primary in each year considered. METHODOLOGY
All data are taken from the Reports of the Australian Commissioner of Taxation starting with the 32nd Report (1953) and continuing annually up to and including the 60th Report (1980-81). To obtain a full 30 year time series the primary Gini coefficients were calculated using taxable income figures. Actual or net income was not used because of the definitional changes implemented for 197()"71 and the rebate system introduced in 1975-76. These changes would not allow comparability between Gini coefficients calculated on 'net' and 'actual' incomes over the 30 year period. This study uses individual incomes only and does not segregate into sexes, ages or geographical distribution since the objective is to assess whether progressive income tax coincided with greater equity. Table I presents the Gini coefficients from 1950-51 to 1979-80. Column 1 presents G, the primary Gini while column 2 presents G·. the secondary Gini. Column 3 shows the absolute reduction in the Gini coefficient due to personal income taxation. Column 4 presents the percentage reduction. Before analysing the redistributive effects of personal income tax, comment must be made on the trend in the primary Gini. There is evidence that the inequality in taxable incomes has decreased steadily and significantly over the 30 year period. No explanation is undertaken here except to comment that the rebate system introduced in 1975-76 has tended to reduce the primary Gini in the late 1970s. I. Russell Mathews, "The Structure of Taxation", in The Politics of Taxation,
A.1.P.S., Hodder & Stoughton, Sydney, 1980, PP. 82-124, p. 118.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE I GINI COEFFICIENTS (Calculated from Taxable Income) (2)
(3)
(4)
Primary
Secondary
Percent Change in Gini Coefficient
(Gl
(G*)
Absolute Reduction in Gini Coefficient (G-G*)
0.426 0.347 0.342 0.332 0.330 0.331 0.338 0.320 0.319 0.326 0.328 0.327 0.335 0.323 0.317 0.317 0.320 0.318 0.321 0.324 0.327 0.328 0.295 0.306 0.296 0.271 0.273 0.271 0.262 0.269
0.355 0.303 0.303 0.303 0.309 0.311 0.315 0.306 0.302 0.314 0.3 14 0.316 0.322 0.309 0.304 0.303 0.305 0.306 0.309 0.309 0.312 0.311 0.278 0.281 0.261 0.225 0.229 0.223 0.215 0.222
0.071 0.044 0.039 0.029 0.021 0.020 0.023 0.014 0.017 0.012 0.014 0.01 J 0.013 0.014 0.014 0.014 0.015 0.012 0.012 0.015 0.015 0.017 0.017 Om5 Om5 0.046 0.044 0.048 0 ..047 0.047
(I)
1950-51 51·52 52·53 53·54 54·55 55·56 56·57 57·58 58·59 59-60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68 68-69 69·70 J970-71 71-72 72·73 73-74 74·75 75·76 76·77 77·78 78·79 1979·80
-16.67 -12.68 -11.40 -8.73 -6.36 -6.43 -6.80 -4.38 -5.33 -3.68 -4.27 -3.36 -3.80 -4.33 -4.42 -4.42 -4.69 -3.77 -3.74 -4.63 -4.59 -5.18 -5.76 -8.17 -11.82 -16.97 -16.12 -17.71 -17.94 -17.47
SOURCK All tables are calculated from data take~ from the Report of the Commissioner of Taxation, 1953 to 1980-81.
2. Commissioner of Taxation, Report of the Commissioner 0/ Taxation, 32nd Report to 60th Report, A_G.P.S., Canberra, 1953 to 1980-8 I.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
Every year some reduction ·in inequality of income has occurred and the reduction over the years 1954·55 to around 1969-70 shows considerable stability. During these years the tax system was not altered, wages were not rising at high rates and economic growth remained fairly constant. The years preceding and following these are the years to examine carefully. The fi':j year examined is one that has generated considerable interest. Lancaster·Jones has stated that the income year 1950-51 was one in which very high incomes were earned in the primary sector, mainly as a result of the wool boom and high prices for primary commodities (due partly to the Korean war) and consequently primary producers, although only II per cent of tax payers, earned 28 per cent total taxable income. He warns that such changes can affect distribution in one or two years and thus distort long run trends. In the years 1950-51 to 1952-53, very high maximum marginal tax rates (75 per cent) tended to redistribute income and the effect was reinforced by the low level of thresholds for the maximum rates (S20,000 compared with S32,000 introduced in 1953-54 and maintained until 197Q-71). In 1953-54 the maximum rate was lowered 5 per cent and the maximum marginal rate threshold raised substantially to S32,OOO and this is renected in the lower percentage reduction in the secondary Gini coefficient. A further reduction in the maximum rate was made in 1954-55 and the amended rate (66.7 per cent) was maintained until 1972-73. Changes in the tax schedule were implemented in 1970 when the number of steps was reduced by one, the minimum marginal tax rate was reduced slightly and the threshold for the maximum marginal rate reduced significantly. These factors were responsible for reducing the percentage change in redistribution through income tax to the smallest level in the 30 year period. The tax system introduced in 1970-71 was maintained for only one further year before major changes were made, including raising the maximum marginal rate threshold to S40,OOO. The changes in the 1970s, reducing the number of steps in 1974, 1975 and J 978 combined with the increased thresholds (through rebates and indexation) for both minimum and maximum rates and increases in the minimum rates (20 per cent in 1975; 27 per cent in 1977,32 per cent in 1978 and 33.07 per cent in 1979) redistributed income after tax in a fairly significant way over the years since 197374.
The Gini coefficients provide a useful summary measure of whether income redistribution has occurred and indications are that the extent of income redistribution is increasing. The question is: who benefits from this redistribution? This information can be extracted by examining the quintiJe shares of primary and secondary incomes. These reveal the source and the incidence of the redistribution that the Gini coefficients indicated. Table 2 presents the quintile shares of income before and after tax for the total tax paying population for the years 1950-51 to 1970-80. The ftrst quintile re· presents that one·fifth of the tax paying population who have the lowest incomes. For example, in 1950..51 this quintiJe received 7.55 per cent of total primary income and 8.86 per cent of total secondary income. The data in Table 2 are used to calculate Tables 3 and 4 and are not discussed in any great detail since the implications of them are examined using Tables 3 and 4. 3. F. Lancaster-Jones, "The Changing Shape of the Australian Income Distribution", Australian Economic History Review, 15,1975, pp. 21-34, Footnote 26.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 2 QUINTILE SHARES OF INCOME BEFORE AND AFTER TAX FOR THE TOTAL TAX PAYING POPULATION: 1950-51 TO 1979-80 4
01 Pri.
02 Sec.
8.86 8.99 9.80 53-54 8.52 9.43 54-55 8.21 . 9.02 55-56 7.85 8.64 56-57 7.48 8.29
Pri.
Q4
03 Sec.
Pri.
Sec.
Pri.
1950-51 7.55
11.70 13.40 13.49 15.30 17.61
51-52 7.87 52-53 8.73
13:66 15.08 18.56 19.95 16.83 14.13 15.37 15.73 16.71 19.65 14.17 15.28 18.15 19.17 21.69 13.23 14.17 17.89 18.80 19.75 14.99 15.95 17.74 18.60 19.22 14.39 15.44 17.19 18.15 20.78 14.80 15.74 17.50 18.33 21.34 14.54 15.46 17.26 18.07 21.25 14.34 15.25 16.79 17.61 20.80 14.07 14.99 16.15 17.07 22.63 13.75 14.68 18.66 19.44 20.33 13.27 14.33 18.19 18.84 20.04 13.50 14.48 17.27 18.14 20.75 13.05 14.10 18.69 19.58 21.16 14.20 15.29 17.14 18.06 21.16 12.86 13.96 18.21 19.15 20.68
57-58 7.71 58-59 7.49
59-60 8.02 1960-6'1 7.80 61-62 7.68
8.47
8.23 8.79 8.60 8.42
62-63 7.30
8.09
63-64 8.59 64-65 8.20
9.48 9.14
65-66 66-67 67-68 68-69
7.93 8.33 8.00 7.38
69-70 1970-71 71-72 72-73 73-74
7.58 6.88 6.77 8.69 8.15
8.89 9.35 9.03 8.40 8.67 7.86 7.82 9.82
13.94
15.09 16.44
74-75 7.52 75-76 9.28
13.19 14.38 17.28 13.00 14.23 18.54 13.24 14.44 17.98 13.73 15.01 17.95 14.20 15.37 16.68 9.42 13.22 14.54 18.35 8.97 14.37 16.05 18.15 10.58 15.00 15.93 18.00
76-77 9.27
10.71
77-78 9.44
14.20 15.32 18.91
10.93 13.99 15.06 18.68 78-79 10.04 11.54 14.39 15.37 18.25 1979-80 9.33 10.89 15.05 15.93 17.~2
05 Sec.
Pri.
Sec.-
19.59 49.65 42.85 18.11 43.08 37.88 21.02 41.77 37.\0 22.54 37.47 33.58
20.69 40.92 37.32 19.97 40.21 36.84 21.5 I 40.16 36.61 21.99 38.66 35.47 21.91 39.47 36.33 21.41 40.06 36.94 23.20 39.35 36.14 20.94 39.59 36.53 20.71 41.20 38.03 21.38 39.90 36.53 21.74 38.90 35.44 21.78 39.58 35.98 21.32 39.92 36.22
17.45 22.22 22.81
39.39 35.60
18.30 26.57 27.07 35.58 31.84 19.55 23.8\ 24.32 37.07 33.23 18.95 20.67 21.08 . 41. 22 37.64
18.96 24.58 24.84 36.96 33.37 17.77 22.81 23. I 8 37.62 33.86 19.30 21.99 22.37 38.29 34.37 19.46 23.98 24.21 35.98 31.31 18.76 22.75 23.15 34.98 31.58 19.52 22.21 22.47 35.40 31.99 19.23 21.98 22.14 35.90 32.65 18.74 22.43 22.40 34.89 31.95 18.22 23.95 23.8 I 34.05 31.14
• Primary and Secondary
4. The most difficult problems of estimation are associated with the fact that the boundaries between the five groups fall within the income bracket used in the published statistics. For example, in Income Year 1967-68, 18.53 per cent of tax payers had taxable incomes of less than SI,400, while 23.55 per cen t had less than S 1,600. To estimate the amount received by 20 per cent, it is assumed that the 5.02 per cent who received incomes between S1,400 and $1,599 were evenly distributed over this income bracket.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 3 CHANGES IN QUINTILE SHARE OF INCOME (ABSOLUTE AND PER CENT)5 AS A RESULT OF PERSONAL INCOME TAX
1950-51 5 I-52 52-53 53-54 54-55 55-56 56-57 57-58 58-59 59-60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68 68-69 69-70 1970-71 71-72 72-73 73-74 74-75 75-76 76-77 77-78 78-79 1979-80
QI
Q2
Q3
1.31(19.3) 1.1 2(21.5) 1.07(22.9) 0.91(23.4) 0.81 (22.5) 0.79(23.4 ) 0.81(22.8) 0.76(23.8) 0.74(23.6) 0.77(24.7) 0.80(24.9) 0.74(24.2) 0.79(24.9) 0.89(26.4) 0.94(27.2) 0.96(26.7) 1.02(27.6) 1.03(27.4) 1.02(27.3) 1.09(28.4) 0.98(27.5) 1.05(29.2) 1.13(30.1 ) 1.27(32.4) 1.45(31.0) 1.30(38.2) 1.44(42.0) 1.49(45.6) 1.50(50.5) 1.56(51.1)
1.70(25.0) 1.42(27.3) 1.24(26.6) 1.11(28.5) 0.94(26.1) 0.96(28.5) 1.05(29.6) 0.94(29.5) 0.92(29.3) 0.91(29.2) 0.92(28.7) 0.93(30.4) 1.06(33.4) 0.98(29.1) 1.05(30.3) 1.09(30.3) 1.10(29.7) 1,15(30.6) 1.1 9(3 1.8) 1.23(32.0) 1.20(33.7) 1.27(35.4) 1.1 7(3 1.1) 1.32(33.7) 1.68(36.0) 0.93(27.4) 1.1 2(32.6) 1.07(32.7) 0.98(33.0) 0.88(28.9)
1.81(26.6) 1.39(26.7) 0.98(20.9) 1.02(26.2) 0.91(25.3) 0.86(25.5) 0.96(27.0) 0.83(26.0) 0.81 (25.8) 0.83(26.6) 0.92(28.7) 0.78(25.5) 0.65(20.5) 0.87(25.8) 0.89(25.7) 0.92(25.6) 0.94(25.4) 1.0 I(26.6) 1.02(27.3) 1.01(26.3) 0.97(27.2) 1.02(28.4) 1.09(29.0) 0.95(24.2) 1.31(28.1) 0.76(22.4 ) 0.61(17.8) 0.55(16.8) 0.49(16.5) 0.60(19.7)
Q4 1.98(29.1) 1.28(24.6) 1.37(29.3) 0.85(21.8) 0.94(26.1) 0.75(22.3) 0.73(20.6) 0.65(20.4) 0.66(21.0) 0.61(19.6) 0.57(17.8) 0.61(19.9) 0.67(21.1) 0.63(18.7) 0.58(16.8) 0.62(17.2) 0.64(17.3) 0.59(15.6) 0.50(13.4) 0.51(13.3) 0.41(11.5) 0.26( 7.2) 0.37( 9.8) 0.38( 9.7) 0.23( 4.9) 0.40(11.8) 0.26( 7.6) 0.16( 4.9) -0.03(-1.1 ) -0.14(4.6)
S. Per cent totals may not sum to one hundred because of rounding.
Q5 -6.80(100) -5.20(100) -4.67(100) -3.89(100) -3.60(100) -3.37(100) -3.55(100) -3.19(100) -3.14(100) -3.12(100) -3.21(100) -3.06(100) -3. I 7(1 00) -3.37(100) -3.46(100) -3.60(100) -3.70(100) -3.79(100) -3.74(100) -3.84(100) -3.56(100) -3.59(100) -3.76(100) -3.92(100) -4.67(100) -3.40(100) -3.41(100) -3.25(100) -2.94(98.9) -2.91 (95.4)
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
The fifth quintile in 19So-S I renects the primary producer proble'll of that income year but over the following years the distribution of income, especially primary, has remained relatively constant. For example, if 19So-S1 is ignored, the primary share in the second quintile has varied only between J 2.86 per cent and IS.OS per cent over the 30 year period with a similar non-variance in the secondary category. The data for the year 1979-80 require some comment. Following the wage explosions of 1974, wage indexation had been implemented, at leasfin part, to reduce the effects of flSCal drag on tax payers. This had allowed the quintile percentages t.o remain fairly constant over the late 1970s as wages had continued to grow and the taxation thresholds had been adjusted, except for 1979-80, when the thresholds were maintained at the 1978-79 levels. Som'e changes to the primary distribution of the top quintile are evident. There was a reduction from 43.08 per cent of total taxable income (excluding 19S0-SI) in 1951-52 to 34.05 per cent in 1979-80, The reasons for this are not discussed as they digress from the objectives of this paper. Table 3 is constructed using the percentage changes from primary to secondary income distribution from Table 2 and dissecting the changes into percentages among the qUintiles, e.g. 19S0-S1 shows that as a result of income tax the fifth quintile loses 6."80 per cent of total income, This 6.80 per cent is divided amongst the other quintiles as shown, 1.31 (19.3 per cent -of 6.80) goes into the first etc. Table 3 is significant In that it shows that redistribution due to income tax has progressively increased over the period in terms of reallocating income from those in the higher quintiles to those in the lower. Jf the year 19S0-S I is excluded, the first qUintile receives 21.S per cent in 19S1-S2 of the redistributlon and this percentage increases (fairly consistently) up to S 1.1 per cent in 1979-80, The increase in the second quintile has remained stable ranging from 26,6 per cent to 36.0 per cent and does not show any defmite trend over this period while the gain to the third quintile from taxation was reduced from 26.7 per cent in 1951-52 to 19.7 per cent in-} 979-80. The fourth quintile received redistributed income in 1951-52 in the fonn of 24.6 per cent of the redistribution but this gain reduced over the years significantly until a low of 3.9 per cent gain was reached in 1977-78. This was reversed in ]978-79 when the fourth quintile actually contributed to the gains in the first, second and third quintile. Even without indexation in 1979-80 the reversed trend continued in that redistribution from the fourth and fifth quintile occurred, resulting in significant changes in the secondary distribution in the lower 60 per cent of the tax paying population. It is interesting to note that the Howard-Fraser tax system has contributed very significantly to the redistribution of secondary income. The bottom two quintiles of tax payers have benefitted from more than 75 per cent of the redistribution from 1976-77 onwards and the trend is towards more redistribution, as s~own by the redistribution from the fourth quintile. This is in contrast to the 19505 when the redistribution favoured the fourth and third quintiles. Table 4 presents the secondary gain or loss to each quintile as a percentage of the primary income in that quintile. In 1951-52, the first quintile gained 14.23 per cent of income before tax while the fifth quintile lost 12.07 per cent of income. The general trend is maintained. T~e first qujntil~ gains increase over the time period from around 12 per cent to 16 per cent in the late 19705. The gains to the second quintile remain fairly constant but the gains to the third and fourth quintile are progressively reduced. The losses in the fifth quintile do not show any long-run trend and remain between about 7 per cent and 12 per cent..
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 4 CHANGE AS A RESULT OF PERSONAL INCOME TAXATION AS A PER CENT OF PRIMARY INCOME SHARE
1950-51 51·52 52-53 53-54 54-55 55-56 56-57 57·58 58-59 59.:60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68
68-69 69·70 1970-71 71·72 72·73 73-74 74-75 75-76 76-77 77·78 78-79 1979-80
QI
Q2
Q3
Q4
Q5
17.35 14.23 12.26 10.69 9.87 10.06 10.83 9.86
14.53 10.40 8.77 7.83 7.11 6.40 7.30 6.35 6.33 6.35 6.54 6.76 7.99 7.26 8.05 7.68
13.42 7.49 6.23 5.62 5.09 4.85 5.58 4.74 4.69 4.94 5.70 4.18 3.57
13.61 7.61 6.97 3.92 4.76 3.90 3.51 3.05 3.11 2.93 2.52 3.00 3.34 3.04 2.74 2.93 3.09 2.66 1.88 2.14 1.98
-13.70 -12.07 -11.18 -10.38 -8.80 -8.38
9.88 9.60 10.26 9.64 10.82 10.36 11.46 12.11 12.24 12.88 13.82 14.38 14.24 15.51 13.00 15.58 19.28 14.00 14.85 15.78 14.94 16.72
8.55 8.25 9.02 9.46. 9.06 9.24 8.24 9.98 11.69 6.20 7.88 7.64 6.81 5.85
5.04 4.76 5.37 5.16 6.14
5.96 5.45 5.39 5.68 6.53 5.18 7.21 4.22 3.23 2.94 2.86 3.41
1.06 1.62 I. 73 0.96 1.73 1.18 0.73 -0.13 -0.58
-8.88 -8.25
-7.96 -7.79 -8.16 -7.73 -7.69 -8.45 -8.89 -9.10 -9.27 -9.62 -10.36 -9.98 -8.64 -9.71 -9.99 -10.24 -12.98 -9.72 -9.63 -9.05 -8.43 -8.55
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
If one examines a specific year, e.g. 1973-74, it is important to note that 10.25 per cent reduction in the fifth quintiJe as a result of personal income tax is responsible for a gain in the first quintile of 15.58 per cent, in the second of 9.98 per cent, 5.18 per cent in the third and 1.73 per cent in the fourth. This suggests the possibility that a revision of the progressivity of the system could provide a more egalitarian distribution of income. It is not suggested that comparisons between primary and secondary income distributions are adequate to establish the progressivity of the tax system but rather that a more progressive system would: (i) redistribute a greater share of income; and (ij) reallocate the income to those areas where it will have most benefit.
CONCLUSIONS Annual levelling of incomes has occurred through income taxation. The trend has involved a redistribution in the long run from the fifth quintile (and occasionally the fourth) to the lower quintiles. This agrees with one of the principles of progressive income taxation in that those who l
Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
THE REDISTRIBUTIONAL EFFECT OF PERSONAL INCOME TAX IN AUSTRALIA T. M. Alchin Lecturer in Economics University of Wollongong INTRODUCTION
The purpose of this paper is to show that the progressive income tax in Australia has achieved some equity in terms of income redistribution by personal income taxation. There are many redistributional aspects associated with the actions and policies of governments. For example. public education is primarily a redistrib~tion of income (rom the wealthy to the poor. from small families to large ones and from older to younger generations. Debate also centres on whether the redistribution should be in terms of public goods, cash benefits or progressive income taxes. This study aims to refute the argument that has been expressed that the progressive incpme tax system has failed to achieve any equity through redistribution of income. Data examined in this study show that annual levelling of incomes has occurred through taxation especially in the last decade. It is not the purpose of this paper to argue whether the primary (or pre-tax) income distribution is more equitable in 1979-80 than in 1950-51. Rather comment is made on what can be established in terms of the incidence or redistributive imp'act of income tax, i.e. whether the secondary (or post-tax) income is more equitable than the primary in each year considered. METHODOLOGY
All data are taken from the Reports of the Australian Commissioner of Taxation starting with the 32nd Report (1953) and continuing annually up to and including the 60th Report (1980-81). To obtain a full 30 year time series the primary Gini coefficients were calculated using taxable income figures. Actual or net income was not used because of the definitional changes implemented for 197()"71 and the rebate system introduced in 1975-76. These changes would not allow comparability between Gini coefficients calculated on 'net' and 'actual' incomes over the 30 year period. This study uses individual incomes only and does not segregate into sexes, ages or geographical distribution since the objective is to assess whether progressive income tax coincided with greater equity. Table I presents the Gini coefficients from 1950-51 to 1979-80. Column 1 presents G, the primary Gini while column 2 presents G·. the secondary Gini. Column 3 shows the absolute reduction in the Gini coefficient due to personal income taxation. Column 4 presents the percentage reduction. Before analysing the redistributive effects of personal income tax, comment must be made on the trend in the primary Gini. There is evidence that the inequality in taxable incomes has decreased steadily and significantly over the 30 year period. No explanation is undertaken here except to comment that the rebate system introduced in 1975-76 has tended to reduce the primary Gini in the late 1970s. I. Russell Mathews, "The Structure of Taxation", in The Politics of Taxation,
A.1.P.S., Hodder & Stoughton, Sydney, 1980, PP. 82-124, p. 118.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE I GINI COEFFICIENTS (Calculated from Taxable Income) (2)
(3)
(4)
Primary
Secondary
Percent Change in Gini Coefficient
(Gl
(G*)
Absolute Reduction in Gini Coefficient (G-G*)
0.426 0.347 0.342 0.332 0.330 0.331 0.338 0.320 0.319 0.326 0.328 0.327 0.335 0.323 0.317 0.317 0.320 0.318 0.321 0.324 0.327 0.328 0.295 0.306 0.296 0.271 0.273 0.271 0.262 0.269
0.355 0.303 0.303 0.303 0.309 0.311 0.315 0.306 0.302 0.314 0.3 14 0.316 0.322 0.309 0.304 0.303 0.305 0.306 0.309 0.309 0.312 0.311 0.278 0.281 0.261 0.225 0.229 0.223 0.215 0.222
0.071 0.044 0.039 0.029 0.021 0.020 0.023 0.014 0.017 0.012 0.014 0.01 J 0.013 0.014 0.014 0.014 0.015 0.012 0.012 0.015 0.015 0.017 0.017 Om5 Om5 0.046 0.044 0.048 0 ..047 0.047
(I)
1950-51 51·52 52·53 53·54 54·55 55·56 56·57 57·58 58·59 59-60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68 68-69 69·70 J970-71 71-72 72·73 73-74 74·75 75·76 76·77 77·78 78·79 1979·80
-16.67 -12.68 -11.40 -8.73 -6.36 -6.43 -6.80 -4.38 -5.33 -3.68 -4.27 -3.36 -3.80 -4.33 -4.42 -4.42 -4.69 -3.77 -3.74 -4.63 -4.59 -5.18 -5.76 -8.17 -11.82 -16.97 -16.12 -17.71 -17.94 -17.47
SOURCK All tables are calculated from data take~ from the Report of the Commissioner of Taxation, 1953 to 1980-81.
2. Commissioner of Taxation, Report of the Commissioner 0/ Taxation, 32nd Report to 60th Report, A_G.P.S., Canberra, 1953 to 1980-8 I.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
Every year some reduction ·in inequality of income has occurred and the reduction over the years 1954·55 to around 1969-70 shows considerable stability. During these years the tax system was not altered, wages were not rising at high rates and economic growth remained fairly constant. The years preceding and following these are the years to examine carefully. The fi':j year examined is one that has generated considerable interest. Lancaster·Jones has stated that the income year 1950-51 was one in which very high incomes were earned in the primary sector, mainly as a result of the wool boom and high prices for primary commodities (due partly to the Korean war) and consequently primary producers, although only II per cent of tax payers, earned 28 per cent total taxable income. He warns that such changes can affect distribution in one or two years and thus distort long run trends. In the years 1950-51 to 1952-53, very high maximum marginal tax rates (75 per cent) tended to redistribute income and the effect was reinforced by the low level of thresholds for the maximum rates (S20,000 compared with S32,000 introduced in 1953-54 and maintained until 197Q-71). In 1953-54 the maximum rate was lowered 5 per cent and the maximum marginal rate threshold raised substantially to S32,OOO and this is renected in the lower percentage reduction in the secondary Gini coefficient. A further reduction in the maximum rate was made in 1954-55 and the amended rate (66.7 per cent) was maintained until 1972-73. Changes in the tax schedule were implemented in 1970 when the number of steps was reduced by one, the minimum marginal tax rate was reduced slightly and the threshold for the maximum marginal rate reduced significantly. These factors were responsible for reducing the percentage change in redistribution through income tax to the smallest level in the 30 year period. The tax system introduced in 1970-71 was maintained for only one further year before major changes were made, including raising the maximum marginal rate threshold to S40,OOO. The changes in the 1970s, reducing the number of steps in 1974, 1975 and J 978 combined with the increased thresholds (through rebates and indexation) for both minimum and maximum rates and increases in the minimum rates (20 per cent in 1975; 27 per cent in 1977,32 per cent in 1978 and 33.07 per cent in 1979) redistributed income after tax in a fairly significant way over the years since 197374.
The Gini coefficients provide a useful summary measure of whether income redistribution has occurred and indications are that the extent of income redistribution is increasing. The question is: who benefits from this redistribution? This information can be extracted by examining the quintiJe shares of primary and secondary incomes. These reveal the source and the incidence of the redistribution that the Gini coefficients indicated. Table 2 presents the quintile shares of income before and after tax for the total tax paying population for the years 1950-51 to 1970-80. The ftrst quintile re· presents that one·fifth of the tax paying population who have the lowest incomes. For example, in 1950..51 this quintiJe received 7.55 per cent of total primary income and 8.86 per cent of total secondary income. The data in Table 2 are used to calculate Tables 3 and 4 and are not discussed in any great detail since the implications of them are examined using Tables 3 and 4. 3. F. Lancaster-Jones, "The Changing Shape of the Australian Income Distribution", Australian Economic History Review, 15,1975, pp. 21-34, Footnote 26.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 2 QUINTILE SHARES OF INCOME BEFORE AND AFTER TAX FOR THE TOTAL TAX PAYING POPULATION: 1950-51 TO 1979-80 4
01 Pri.
02 Sec.
8.86 8.99 9.80 53-54 8.52 9.43 54-55 8.21 . 9.02 55-56 7.85 8.64 56-57 7.48 8.29
Pri.
Q4
03 Sec.
Pri.
Sec.
Pri.
1950-51 7.55
11.70 13.40 13.49 15.30 17.61
51-52 7.87 52-53 8.73
13:66 15.08 18.56 19.95 16.83 14.13 15.37 15.73 16.71 19.65 14.17 15.28 18.15 19.17 21.69 13.23 14.17 17.89 18.80 19.75 14.99 15.95 17.74 18.60 19.22 14.39 15.44 17.19 18.15 20.78 14.80 15.74 17.50 18.33 21.34 14.54 15.46 17.26 18.07 21.25 14.34 15.25 16.79 17.61 20.80 14.07 14.99 16.15 17.07 22.63 13.75 14.68 18.66 19.44 20.33 13.27 14.33 18.19 18.84 20.04 13.50 14.48 17.27 18.14 20.75 13.05 14.10 18.69 19.58 21.16 14.20 15.29 17.14 18.06 21.16 12.86 13.96 18.21 19.15 20.68
57-58 7.71 58-59 7.49
59-60 8.02 1960-6'1 7.80 61-62 7.68
8.47
8.23 8.79 8.60 8.42
62-63 7.30
8.09
63-64 8.59 64-65 8.20
9.48 9.14
65-66 66-67 67-68 68-69
7.93 8.33 8.00 7.38
69-70 1970-71 71-72 72-73 73-74
7.58 6.88 6.77 8.69 8.15
8.89 9.35 9.03 8.40 8.67 7.86 7.82 9.82
13.94
15.09 16.44
74-75 7.52 75-76 9.28
13.19 14.38 17.28 13.00 14.23 18.54 13.24 14.44 17.98 13.73 15.01 17.95 14.20 15.37 16.68 9.42 13.22 14.54 18.35 8.97 14.37 16.05 18.15 10.58 15.00 15.93 18.00
76-77 9.27
10.71
77-78 9.44
14.20 15.32 18.91
10.93 13.99 15.06 18.68 78-79 10.04 11.54 14.39 15.37 18.25 1979-80 9.33 10.89 15.05 15.93 17.~2
05 Sec.
Pri.
Sec.-
19.59 49.65 42.85 18.11 43.08 37.88 21.02 41.77 37.\0 22.54 37.47 33.58
20.69 40.92 37.32 19.97 40.21 36.84 21.5 I 40.16 36.61 21.99 38.66 35.47 21.91 39.47 36.33 21.41 40.06 36.94 23.20 39.35 36.14 20.94 39.59 36.53 20.71 41.20 38.03 21.38 39.90 36.53 21.74 38.90 35.44 21.78 39.58 35.98 21.32 39.92 36.22
17.45 22.22 22.81
39.39 35.60
18.30 26.57 27.07 35.58 31.84 19.55 23.8\ 24.32 37.07 33.23 18.95 20.67 21.08 . 41. 22 37.64
18.96 24.58 24.84 36.96 33.37 17.77 22.81 23. I 8 37.62 33.86 19.30 21.99 22.37 38.29 34.37 19.46 23.98 24.21 35.98 31.31 18.76 22.75 23.15 34.98 31.58 19.52 22.21 22.47 35.40 31.99 19.23 21.98 22.14 35.90 32.65 18.74 22.43 22.40 34.89 31.95 18.22 23.95 23.8 I 34.05 31.14
• Primary and Secondary
4. The most difficult problems of estimation are associated with the fact that the boundaries between the five groups fall within the income bracket used in the published statistics. For example, in Income Year 1967-68, 18.53 per cent of tax payers had taxable incomes of less than SI,400, while 23.55 per cen t had less than S 1,600. To estimate the amount received by 20 per cent, it is assumed that the 5.02 per cent who received incomes between S1,400 and $1,599 were evenly distributed over this income bracket.
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 3 CHANGES IN QUINTILE SHARE OF INCOME (ABSOLUTE AND PER CENT)5 AS A RESULT OF PERSONAL INCOME TAX
1950-51 5 I-52 52-53 53-54 54-55 55-56 56-57 57-58 58-59 59-60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68 68-69 69-70 1970-71 71-72 72-73 73-74 74-75 75-76 76-77 77-78 78-79 1979-80
QI
Q2
Q3
1.31(19.3) 1.1 2(21.5) 1.07(22.9) 0.91(23.4) 0.81 (22.5) 0.79(23.4 ) 0.81(22.8) 0.76(23.8) 0.74(23.6) 0.77(24.7) 0.80(24.9) 0.74(24.2) 0.79(24.9) 0.89(26.4) 0.94(27.2) 0.96(26.7) 1.02(27.6) 1.03(27.4) 1.02(27.3) 1.09(28.4) 0.98(27.5) 1.05(29.2) 1.13(30.1 ) 1.27(32.4) 1.45(31.0) 1.30(38.2) 1.44(42.0) 1.49(45.6) 1.50(50.5) 1.56(51.1)
1.70(25.0) 1.42(27.3) 1.24(26.6) 1.11(28.5) 0.94(26.1) 0.96(28.5) 1.05(29.6) 0.94(29.5) 0.92(29.3) 0.91(29.2) 0.92(28.7) 0.93(30.4) 1.06(33.4) 0.98(29.1) 1.05(30.3) 1.09(30.3) 1.10(29.7) 1,15(30.6) 1.1 9(3 1.8) 1.23(32.0) 1.20(33.7) 1.27(35.4) 1.1 7(3 1.1) 1.32(33.7) 1.68(36.0) 0.93(27.4) 1.1 2(32.6) 1.07(32.7) 0.98(33.0) 0.88(28.9)
1.81(26.6) 1.39(26.7) 0.98(20.9) 1.02(26.2) 0.91(25.3) 0.86(25.5) 0.96(27.0) 0.83(26.0) 0.81 (25.8) 0.83(26.6) 0.92(28.7) 0.78(25.5) 0.65(20.5) 0.87(25.8) 0.89(25.7) 0.92(25.6) 0.94(25.4) 1.0 I(26.6) 1.02(27.3) 1.01(26.3) 0.97(27.2) 1.02(28.4) 1.09(29.0) 0.95(24.2) 1.31(28.1) 0.76(22.4 ) 0.61(17.8) 0.55(16.8) 0.49(16.5) 0.60(19.7)
Q4 1.98(29.1) 1.28(24.6) 1.37(29.3) 0.85(21.8) 0.94(26.1) 0.75(22.3) 0.73(20.6) 0.65(20.4) 0.66(21.0) 0.61(19.6) 0.57(17.8) 0.61(19.9) 0.67(21.1) 0.63(18.7) 0.58(16.8) 0.62(17.2) 0.64(17.3) 0.59(15.6) 0.50(13.4) 0.51(13.3) 0.41(11.5) 0.26( 7.2) 0.37( 9.8) 0.38( 9.7) 0.23( 4.9) 0.40(11.8) 0.26( 7.6) 0.16( 4.9) -0.03(-1.1 ) -0.14(4.6)
S. Per cent totals may not sum to one hundred because of rounding.
Q5 -6.80(100) -5.20(100) -4.67(100) -3.89(100) -3.60(100) -3.37(100) -3.55(100) -3.19(100) -3.14(100) -3.12(100) -3.21(100) -3.06(100) -3. I 7(1 00) -3.37(100) -3.46(100) -3.60(100) -3.70(100) -3.79(100) -3.74(100) -3.84(100) -3.56(100) -3.59(100) -3.76(100) -3.92(100) -4.67(100) -3.40(100) -3.41(100) -3.25(100) -2.94(98.9) -2.91 (95.4)
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
The fifth quintile in 19So-S I renects the primary producer proble'll of that income year but over the following years the distribution of income, especially primary, has remained relatively constant. For example, if 19So-S1 is ignored, the primary share in the second quintile has varied only between J 2.86 per cent and IS.OS per cent over the 30 year period with a similar non-variance in the secondary category. The data for the year 1979-80 require some comment. Following the wage explosions of 1974, wage indexation had been implemented, at leasfin part, to reduce the effects of flSCal drag on tax payers. This had allowed the quintile percentages t.o remain fairly constant over the late 1970s as wages had continued to grow and the taxation thresholds had been adjusted, except for 1979-80, when the thresholds were maintained at the 1978-79 levels. Som'e changes to the primary distribution of the top quintile are evident. There was a reduction from 43.08 per cent of total taxable income (excluding 19S0-SI) in 1951-52 to 34.05 per cent in 1979-80, The reasons for this are not discussed as they digress from the objectives of this paper. Table 3 is constructed using the percentage changes from primary to secondary income distribution from Table 2 and dissecting the changes into percentages among the qUintiles, e.g. 19S0-S1 shows that as a result of income tax the fifth quintile loses 6."80 per cent of total income, This 6.80 per cent is divided amongst the other quintiles as shown, 1.31 (19.3 per cent -of 6.80) goes into the first etc. Table 3 is significant In that it shows that redistribution due to income tax has progressively increased over the period in terms of reallocating income from those in the higher quintiles to those in the lower. Jf the year 19S0-S I is excluded, the first qUintile receives 21.S per cent in 19S1-S2 of the redistributlon and this percentage increases (fairly consistently) up to S 1.1 per cent in 1979-80, The increase in the second quintile has remained stable ranging from 26,6 per cent to 36.0 per cent and does not show any defmite trend over this period while the gain to the third quintile from taxation was reduced from 26.7 per cent in 1951-52 to 19.7 per cent in-} 979-80. The fourth quintile received redistributed income in 1951-52 in the fonn of 24.6 per cent of the redistribution but this gain reduced over the years significantly until a low of 3.9 per cent gain was reached in 1977-78. This was reversed in ]978-79 when the fourth quintile actually contributed to the gains in the first, second and third quintile. Even without indexation in 1979-80 the reversed trend continued in that redistribution from the fourth and fifth quintile occurred, resulting in significant changes in the secondary distribution in the lower 60 per cent of the tax paying population. It is interesting to note that the Howard-Fraser tax system has contributed very significantly to the redistribution of secondary income. The bottom two quintiles of tax payers have benefitted from more than 75 per cent of the redistribution from 1976-77 onwards and the trend is towards more redistribution, as s~own by the redistribution from the fourth quintile. This is in contrast to the 19505 when the redistribution favoured the fourth and third quintiles. Table 4 presents the secondary gain or loss to each quintile as a percentage of the primary income in that quintile. In 1951-52, the first quintile gained 14.23 per cent of income before tax while the fifth quintile lost 12.07 per cent of income. The general trend is maintained. T~e first qujntil~ gains increase over the time period from around 12 per cent to 16 per cent in the late 19705. The gains to the second quintile remain fairly constant but the gains to the third and fourth quintile are progressively reduced. The losses in the fifth quintile do not show any long-run trend and remain between about 7 per cent and 12 per cent..
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
TABLE 4 CHANGE AS A RESULT OF PERSONAL INCOME TAXATION AS A PER CENT OF PRIMARY INCOME SHARE
1950-51 51·52 52-53 53-54 54-55 55-56 56-57 57·58 58-59 59.:60 1960-61 61-62 62-63 63-64 64-65 65-66 66-67 67-68
68-69 69·70 1970-71 71·72 72·73 73-74 74-75 75-76 76-77 77·78 78-79 1979-80
QI
Q2
Q3
Q4
Q5
17.35 14.23 12.26 10.69 9.87 10.06 10.83 9.86
14.53 10.40 8.77 7.83 7.11 6.40 7.30 6.35 6.33 6.35 6.54 6.76 7.99 7.26 8.05 7.68
13.42 7.49 6.23 5.62 5.09 4.85 5.58 4.74 4.69 4.94 5.70 4.18 3.57
13.61 7.61 6.97 3.92 4.76 3.90 3.51 3.05 3.11 2.93 2.52 3.00 3.34 3.04 2.74 2.93 3.09 2.66 1.88 2.14 1.98
-13.70 -12.07 -11.18 -10.38 -8.80 -8.38
9.88 9.60 10.26 9.64 10.82 10.36 11.46 12.11 12.24 12.88 13.82 14.38 14.24 15.51 13.00 15.58 19.28 14.00 14.85 15.78 14.94 16.72
8.55 8.25 9.02 9.46. 9.06 9.24 8.24 9.98 11.69 6.20 7.88 7.64 6.81 5.85
5.04 4.76 5.37 5.16 6.14
5.96 5.45 5.39 5.68 6.53 5.18 7.21 4.22 3.23 2.94 2.86 3.41
1.06 1.62 I. 73 0.96 1.73 1.18 0.73 -0.13 -0.58
-8.88 -8.25
-7.96 -7.79 -8.16 -7.73 -7.69 -8.45 -8.89 -9.10 -9.27 -9.62 -10.36 -9.98 -8.64 -9.71 -9.99 -10.24 -12.98 -9.72 -9.63 -9.05 -8.43 -8.55
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Economic Analysis and Policy
Vol. 11 No. 01 & 02, March/Sept. 1981
If one examines a specific year, e.g. 1973-74, it is important to note that 10.25 per cent reduction in the fifth quintiJe as a result of personal income tax is responsible for a gain in the first quintile of 15.58 per cent, in the second of 9.98 per cent, 5.18 per cent in the third and 1.73 per cent in the fourth. This suggests the possibility that a revision of the progressivity of the system could provide a more egalitarian distribution of income. It is not suggested that comparisons between primary and secondary income distributions are adequate to establish the progressivity of the tax system but rather that a more progressive system would: (i) redistribute a greater share of income; and (ij) reallocate the income to those areas where it will have most benefit.
CONCLUSIONS Annual levelling of incomes has occurred through income taxation. The trend has involved a redistribution in the long run from the fifth quintile (and occasionally the fourth) to the lower quintiles. This agrees with one of the principles of progressive income taxation in that those who l