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Distribution matters

By Saul Eslake - posted Monday, 31 October 2011

Among the often inchoate complaints of those who have been ‘Occupying’ public spaces in almost 1000 cities around the world over the past couple of months (including Melbourne and Sydney), one common theme appears to be resentment at the share of income and wealth controlled by, and the degree of political influence exercised by, the richest citizens of each nation.

In the United States, at least, these concerns are quite well-founded. According to data published in the Paris School of Economics’ World Top Incomes Database, the share of total household income accruing to the top 10% of the income distribution in the US rose from 34.6% in 1980 to 48.2% in 2008, an increase of 13.6 percentage points. The share accruing to the top 1% of the income distribution more than doubled, from 10.0% to 21.0%, over the same period; while the share accruing to the top 0.01% of US households ranked by income increased almost fourfold, from 1.3% to 5.0%. The average gross income of the richest 1% of American households rose by 172% in real terms between 1980 and 2008; over the same period the average real incomes of the ‘bottom 90%’ of American households rose by just 2%. Indeed (and staggeringly), the average gross income of households in the ‘bottom 90%’ of the income distribution was, in real terms, lower in 2008 than it had been in the early 1970s.

The situation hasn’t been much different in Britain. There, the share of total household income accruing to the richest 10% of households rose from 31.0% to 40.3% between 1980 and 2007, while the share accruing to the top 1% more than doubled from 6.7% to 14.6% over the same period. The ‘bottom 90%’ of British workers experienced real income increases of 17%, on average, which was a lot more than their American counterparts, but well short of the 103% increase in the real incomes of the top 1% of British adults.


Of course these trends aren’t confined to the purportedly über-liberal societies of the United States and Britain. In traditionally egalitarian Sweden, the richest 10% of households’ share of total income rose by 5.2 percentage points between 1980 and 2009, while the share of the top 1% rose by 2.7 percentage points (although those shares were, at 27.9% and 6.7%, respectively in 2009, a lot smaller than the corresponding shares of the richest 10% and 1% in America and Britain). In the People’s Republic of China, a communist dictatorship, the share of household income accruing to the richest 10% of households increased by more than 10 percentage points, from 17.4% to 27.9%, between 1986 and 2003 (the latest year for which figures are available). That’s a bigger increase than in either the US or the UK over the same period. The income share of the top 1% of Chinese households more than doubled, from 2.7% to 3.9%. 

Here in Australia, the distribution of income hasn’t widened as much as in the US or Britain. According to data compiled by Andrew Leigh (who was a Professor of Economics at the Australian National University before entering Parliament as a Labor MP at the last Federal election), the share of gross household income accruing to the top 10% of Australian households rose by ‘only’ 6.1 percentage points, from 25.4% to 31.5%, between 1980 and 2007; while the share accruing to the top 1% of Australian households rose by 5 percentage points, from 4.8% to 9.8%.  

In each case both the share accruing to the top 10% and 1% of Australian households, and the increase in those shares over the past three decades, was smaller than in either the US or the UK. 

The real income of households in the ‘bottom 90%’ of Australian households rose by 30% between 1980 and 2007 – although, interestingly, all of that increase occurred after 1997: real income of the ‘bottom’ 90% actually fell by 8% between 1980 and 1993. However the real income of the richest 1% of Australian households rose by 189% between 1980 and 2007 – about the same as in the United States. 

All of these figures are based on gross income, that is, before taking into account the impact of the taxation and social security systems. In Australia’s case, these have reduced the extent to which the distribution of income generated by the market has become more polarized. Australia has a highly progressive social security system, largely reflecting the fact that most social security payments in Australia are means-tested. According to the University of New South Wales’ Professor Peter Whiteford, the pensions and benefits received by the poorest 20% of Australian households are more than 12 times those received by the richest 20% of households, a higher ratio than for any other OECD country (and almost six times the OECD average). The Australian personal income tax system is also progressive: the richest 20% of households pay twice as much of their gross income in tax as the poorest 20%.

Nonetheless, even after allowing for the impact of the tax and transfer systems, the distribution of income and wealth in Australia has become less egalitarian over the past two decades. According to recently-released ABS data, the share of household disposable income accruing to the richest 20% of Australians has increased from 37.8% in 1994-95 to 40.2% in 2009-10, while that of each of the four lowest ‘quintiles’ (fifths) has fallen over the same period. (In the United States, according to a study published this week by the Congressional Budget Office, the share of household disposable income accruing to the richest 20% of American households was more than 52% in 2007).


And although Australia’s income tax system is progressive, it has become less so over the past decade. Reflecting the significant increases in the thresholds at which the top rates of income tax have become payable since 2004, and the halving of the tax rates on capital gains since 1999, the proportion of gross income paid in income tax by the richest 20% of households has fallen by 4.2 percentage points since 2003-04, more than for any other group of households.

Wealth is even less equally distributed than income, in part because wealth (and the income generated by it) is much less lightly taxed than wage and salary income. The share of household net worth owned by the richest 20% of Australian households has risen from 58.6% in 2003-04 to 62.2% in 2009-10. 

One doesn’t need to be a socialist (and I’m certainly not) to be concerned about trends such as these. An increasingly polarized distribution of income and wealth can have adverse consequences for economic performance. The stagnation in ordinary Americans’ real incomes over such a long period of time undoubtedly prompted many of them to accumulate what eventually turned out to be unsustainable levels of debt in order to maintain their lifestyles, and was thus one of the underlying causes of the global financial crisis. 

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This article was first published in the business pages of The Age and the online version of the Sydney Morning Herald.

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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