Inequality is increasing in Australia, according to the latest study by the National Centre for Social and Economic Modelling at the University of Canberra.
But before there is a lot of hand-wringing and calls for Government to tax the rich more, the results need to be looked at more closely and the question must be asked: is equality a valuable outcome?
The study said there was strong evidence that inequality of income increased between the late 1980s and mid-1990s and some evidence to suggest it was continuing to increase. The increase was driven by a decline in the income share of the bottom 10 per cent, a small decline of income share in the middle and an increase in income share of the top 10 per cent.
The top 10 per cent have about 23 per cent of the income.
On the other hand, the survey found that on the expenditure side, inequality of expenditure on current goods and services had not changed significantly over the part 10 to 15 years. But when superannuation and investment “”expenditure” is included, inequality increased between 1984 and 1988-89 but decreased from then till the end of the decade.
The conclusions indicate that the bottom group had been diving into savings to make up for income drops.
The study indicated that more retirees and working poor with no children were moving into the bottom 10 per cent while social-security dependent households with children were moving out of the bottom 10 per cent. It seems the former can afford to eat into savings to maintain expenditure while the latter had less scope for this.
So what conclusions should we draw for Australian society? First, the growing inequality is not sharp, so hand-wringing should not be intense. Secondly, even through the spread of income and expenditure is becoming slightly more unequal, the income and expenditure of the households in the bottom 10 per cent had still continued to go up.
It means there is a balance to be struck. It is likely that huge apparent differences in income and expenditure cause resentment, alienation and maybe poorer health outcomes as people below feel a constant struggle to keep up. So huge differences should be avoided. But it is also likely that tax and social-security regimes that aim at too much inequality might cause disincentives and misallocation of resources that result in lower overall wealth. Getting that balance right is mainly the difficult task of government.
The survey’s conclusion about social-security dependent households with children moving out of the bottom 10 per cent is an encouraging sign that government policies can change wealth distribution — for the better if it means children getting a better run.
The survey did not say whether it had taken into account wealth flows outside the tax and social security systems. Often wealth gets transferred within families that is not recorded on Australian Bureau income and expenditure surveys. On the other hand, wealthy people answering these surveys might be reluctant to state their true income if they have managed to avoid tax.
To some extent people seem to be dealing with inequality of income by drawing on savings. That is fine if older people are doing it, but if younger people are not saving or borrowing to spend, it will cause problems later.
Governments should not aim for equality of wealth, income or expenditure as an outcome. It should aim for equality of opportunity. It should look after those in need and it should help those with children. In doing that it will inevitably redistribute wealth somewhat. When it does that it should be careful to do it fairly. At present the evidence suggests that this is not happening. It seems the PAYE taxpayer is copping it unfairly while family trusts, companies and those in business can make arrangements to avoid tax. This is where government should be concentrating its efforts to alleviate the burden on middle income PAYE taxpayers.