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SUMMARY OF FINDINGS

INTRODUCTION

This publication presents the results of a study of the effects of government benefits and taxes on the distribution of income among private households in Australia in 2009–10.

Benefits and taxes included in the study were restricted to those that are relatable to particular types of households and household expenditure. Household income is increased directly by the Australian government through social assistance benefits in the form of cash payments, such as the age pension and family tax benefit, and indirectly by government expenditures such as those on health and education. On the other hand, household income is reduced by taxes on personal income (direct taxes) and by taxes on production (indirect taxes) passed on in the prices households pay for goods and services.

The study excludes government taxes and expenditure that do not relate directly to particular types of households or household expenditure, such as government revenue from corporate taxes and spending on defence, public order and safety, transport and communications.

The most restricted concept of income used in the study is referred to as private income, while the most extensive is final income. Private income is all current receipts, whether monetary or in kind, received excluding social assistance benefits in cash. Private income includes wages and salaries, profit/loss from own unincorporated business, net investment income and private transfers. It also includes net imputed rent for owner occupied dwellings and for subsidised private rentals to allow for more meaningful comparisons of the income circumstances of people living in different tenure types.

Gross income is the sum of private income and Australian government social assistance benefits in cash (direct Australian government benefits) such as age pension, disability support pension, Veterans' Affairs pension, family tax benefit, parenting payment, unemployment and student allowances. Disposable income is derived by subtracting estimates of taxes on personal income from gross income.

The value of government social transfers in kind for education, health, housing, social security and welfare, and electricity concessions and rebates (indirect benefits) is added to disposable income to derive disposable income plus social transfers in kind. Final income is equal to disposable income plus social transfers in kind less taxes on production.

Equivalised household income is derived by applying an equivalence scale to income thereby taking into account households of different sizes and composition. When household income is adjusted using an equivalence scale, the equivalised income can be viewed as an indicator of the economic resources available to a standardised household. In this study, an equivalence scale has been applied to the estimates of household private, disposable and final income.

The methodology, including the assumptions, used in this study is provided in the Explanatory Notes and in Appendices 4 and 5. The results are dependant on the assumptions that are inherent in the methodology.

The aim of the study has been to allocate only those benefits and taxes relatable to particular types of households. Of the total Commonwealth, state and local government taxation revenue in 2009–10, the study allocated taxes of $194,186 million out of $315,689 million or 62% of total government revenue. In relation to total government expenditure, the study allocated $233,989 million in benefits to households out of $459,650 million or 51% of total government expenditure.

The unallocated amounts mainly reflect taxation and government expenditure that are not conceptually relatable to individual households, but they also reflect the lack of suitable indicators on which to allocate some taxation revenue, such as capital gains tax, and some benefits.

In addition, an apparent underreporting by households of some expenditures, including highly taxed products, such as gambling, alcohol and tobacco, resulted in about $23 billion of government taxation revenue unallocated.

More benefits than taxes were allocated in the current study so that on average, benefits exceed taxes. This outcome is not significant in itself as there is not a direct correspondence between the level of government benefits provided to any sector and the means used to finance those benefits.

In 2009–10, average total government benefits were 20% higher in real terms than in the 2003–04 study ($534 and $445 per week, respectively, for all households). Most of the increase in benefits was due to the 26% increase, in real terms, in social transfers in kind received by households ($357 in 2009–10 compared with $283 in 2003–04). Government cash payments increased by 9% in real terms in the same period. There was no significant change in average total taxes, in the 2009–10 study compared to the 2003–04 study (Table 2).

In 2009–10, households received, on average, $91 more in total government benefits (social assistance benefits in cash and social transfers in kind) than they paid in taxes, giving an average final income of $1,704 per week compared to average private income of $1,613 per week (Table 3).

The effects of different benefits and taxes vary with the level of household income. Low income households receive more social benefits in cash and social transfers in kind and pay less taxes than high income households. Social assistance benefits in cash and social transfers in kind increase with household size and decrease as levels of household income rise. The net effect of benefits and taxes is to increase the average income of households in the lower income groups, and decrease the average income of households in the higher income groups.

The redistribution of income from high to low income households can be seen by analysis of equivalised private income quintile groups (Graph S1). Equivalised private income quintile groups are formed by ranking households based on the level of their private income, after adjusting for the size and composition of the household. If no adjustment is made for size and composition, larger households tend to appear in the higher quintile groups as no account is taken of the need for their income to support a larger number of people.

The net effect of benefits and taxes, as shown in this study, was to increase the average income of households in the three lower quintiles and decrease the average income of households in the two higher quintiles. In the lowest quintile, average equivalised private income was $117 per week and average equivalised final income was $641 per week. In the highest quintile, the average equivalised private income was $2,216 per week and average equivalised final income was $1,747 per week (Table 3).

S2. DISTRIBUTION OF HOUSEHOLD INCOME, BENEFITS AND TAXES, by Equivalised private income quintile

	EQUIVALISED PRIVATE INCOME QUINTILE
	Lowest quintile	Second quintile	Third quintile	Fourth quintile	Highest quintile	All households(a)
	%	%	%	%	%	%
Private income	3	9	16	24	48	100
Benefits
Social assistance benefits in cash	58	26	10	4	2	100
Social transfers in kind	30	22	18	15	14	100
Total	39	24	16	12	10	100
Taxes
Taxes on income	-	4	12	23	61	100
Taxes on production	14	15	18	22	31	100
Total	6	9	14	23	49	100
Final income	13	14	16	21	36	100
Equivalised private income	2	10	17	25	46	100
Equivalised final income	13	14	17	21	35	100
- nil or rounded to zero (including null cells)
(a) Includes households with zero or negative income

The system of government benefits and taxes in Australia has been designed to assist those in the community who are most in need of financial support. The allocation of benefits and taxes differs between households, reflecting that characteristics such as household composition, life cycle stages, household size and income have an impact on these allocations. Graphs S3 and S4 show the total taxes (taxes on income and taxes on production) paid and total benefits (social assistance benefits in cash and social transfers in kind) received on average by selected household groups.

Graph S5 gives an indication of the extent of the redistributive impact between different household groups in the population, by comparing equivalised private income and equivalised final income for the same household groups. The measures are equivalised to take into account the differing size and composition of households, providing a better indication of the effect of government benefits and taxes on the relative economic wellbeing of these households.

There were 1.3 million lone person households aged under 65 years in this study (0.3 million under 35 years, and 1.0 million 35 to 65 years). In these households, average social assistance benefits in cash tend to be low. This relates to the absence of children (and therefore family tax benefit and parenting payment) and the high employment levels in these households. Social transfers in kind also tend to be low on average in these households because household size is small, the members do not usually receive school benefits and, due to their age, use of health services is lower. In the 25–34 and 35–44 age ranges, average taxes paid exceeded benefits received by over $200 per week. However, in the 55-64 year age range average benefits received exceeded taxes paid. This was mainly due to an increase in social assistance benefits in cash and health benefits (Table 34).

Couple only households, reference person under 65 years

For the 1.5 million couple only households, where the reference person was under 65 years, households paid, on average, more in total taxes than they received in total benefits ($528 compared to $235). For this household group, equivalised final income was lower than equivalised private income ($1,102 compared to $1,299) (Table 32).

One parent households with dependent children

The 518,500 one parent households with dependent children had higher net benefits (total benefits less total taxes) than any of the selected household groups. Households in this group received very high levels of social assistance benefits in cash, consisting mainly of family tax benefit and parenting payment. The average value of social assistance benefits in cash for this group was $384 per week compared to $177 per week for all households. About half of these households had government pensions and allowances as their main source of income, while 41% received most income from wages and salaries. Social transfers in kind were also relatively high ($577 per week) because of high use of education services, health services and social security and welfare services (Tables 30 and 31).

Taxes on income and taxes on production were both low, since both income and expenditure were low. Total taxes averaged $229 per week of which $79 per week was taxes on income.

The average weekly equivalised private income of one parent households with dependent children was 36% of the average weekly equivalised private income of couple households with dependent children. However due to higher net benefits, the average equivalised final income of this group was a much higher proportion of the average for both couple households with dependent children (78%) and for all households (80%).

Couple households with dependent children

Couple with dependent children households (2.2 million households) received, on average, higher levels of social assistance benefits in cash and social transfers in kind than couple only households where the reference person was under 65 years of age. Social assistance benefits were higher because the households tend to be eligible for family tax benefit, parenting payment and other benefits such as student allowances. Social transfers in kind were also higher. These households received greater education and health benefits due to the increase in household size as well as child care assistance and other social security and welfare benefits (Table 28).

However, as the average private income of these households was relatively high at $2,359 per week, they also paid more taxes on income and with higher expenditures, paid more taxes on production than the average for all households. After taking account of household size and composition, the equivalised private and final household income of couples with dependent children were very similar ($1,027 and $1,037 per week, respectively) just slightly higher than the average for all households.

Couple households with non-dependent children only

Households consisting of couples with non-dependent children only (496,000 households), received slightly more social assistance benefits in cash than couple households with dependent children ($176 and $135 respectively). In these households there were, on average, 2.2 employed persons and wages and salaries were the main source of income for 79% (Table 25). Social transfers in kind were lower than couple households with dependent children because fewer household members used education services. Levels of income and expenditure were both high, resulting in higher taxes on income and taxes on production. On average, couple households with only non-dependent children paid about $100 more in taxes than they received in benefits. Their equivalised private household income averaged $1,141 per week while their average equivalised final household income was not significantly different at $1,094 per week (Table 24).

Lone persons and couple only households, reference person 65 years and over

There were 1.5 million lone person and couple only households aged 65 years and over in 2009–10. In these households, average weekly equivalised private income was $521 for couples where the reference person was 65 years and over, and $425 for lone persons 65 years and over. However, these households received average weekly net benefits (total benefits less total taxes) of $691 and $475, respectively, while taxes paid were relatively low (Table 24).

Therefore, while equivalised private income was amongst the lowest of any household group, their equivalised final income was relatively higher. For couples where the reference person was 65 years or over, equivalised final income was $981 and for lone persons $900. These were 97% and 89% respectively of the average equivalised final income of all households.

The allocation of government benefits and taxes varied across states and territories.

Estimates of social transfers in kind by state and territories may not be entirely accurate, since for some components the allocation does not take into account the varying expenditure by state and territory governments. In addition, there may be some inconsistencies in the classification of government expenditure by state governments in the source data, which could impact on comparability.

In this study, households in the Australian Capital Territory (ACT) received the lowest average total benefits and paid the highest total taxes. Taxes paid exceeded benefits received by an average of $157 per week. By comparison, households in Tasmania received the highest average total benefits and paid the lowest total taxes. Benefits received exceeded taxes paid by $269 per week (Table 40).

Average income also varied between states and territories. Average private income was highest in the ACT and WA. Average equivalised private income in the ACT was 42% higher than the average for Australia. Average equivalised final income, while still significantly higher than the Australian average, was only 25% higher, reflecting the net taxes paid by ACT households. Similarly in WA, equivalised private income was 20% higher than the Australian average and equivalised final income, 12% higher than the Australian average. In Tasmania, which had the lowest average income, equivalised private income was 24% below the Australian average and equivalised final income, 12% below the average, reflecting the net benefits received by Tasmanian households.

The average equivalised final income of households in NSW, Victoria, Queensland and South Australia were very similar to the average for all households.

Appendix 6 includes a comparison by state and territory for the 2003–04 and 2009–10 studies.