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Reduction in inequality due to the social security and income tax systems

Income inequalityInequalityTrends

This tracks the impact of the income support and income tax systems on household income inequality in Australia, using the Gini Coefficient.  The bottom lines show the impact on inequality of the social security system – the difference between private income and gross income. The top lines show the impact on inequality of the income tax system – the difference between gross income and disposable income. Social security payments have a greater overall impact on inequality (ranging from a 9.4% to 11.6% reduction in the Gini for weekly income) than income tax does (ranging from a 4.3% to 5.8% reduction). The impact of social security on inequality decreased in the years before 2008 (represented by the rise in the bottom row), increased shortly afterwards (represented by the fall in the bottom row), then declined after 2011.

The impact of social security on inequality is influenced by three main factors:

(1) Changes in the share of recipients in the overall population
This is shown here. Changes in unemployment were a major factor.
(2) Changes in rates of payment, whether due to indexation or one-off changes such as the increase in pensions in 2009. These are shown here.
(3) Changes in eligibility requirements, such as the transfer of sole parents to Newstart Allowance in 2012. Find out more here.

The impact of income tax on inequality varied in three stages. It decreased (the top row rose), then increased (the top row fell) in the early 2000s, declining in the mid-200s, increasing in the early 2010s, and declining again in the mid-2010s.

The impact of income tax on inequality was also influenced by three main factors:

(1) The impact of inflation and income growth on average tax rates (‘bracket creep’)
(2) Changes to tax rates and thresholds (such as the large tax cuts from 2003 and 2010 which more than offset the impact of bracket creep)(3) Changes in the tax ‘base’ such as restriction on the tax free status of superannuation in 2015). Find out more here.

Broadly speaking, the most important tax changes affecting income inequality were the large income tax cuts from 2003 to 2010 (which increased inequality) and the lack of tax cuts afterwards (which reduced it). Income tax cuts are rarely progressive in overall terms because the lowest one third of individual adults have incomes that are too low to pay tax, so they do not benefit from tax cuts. Find out more here.

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