Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 261

In Australia, who’s got the money?

[Editor's introduction. In The Sydney Morning Herald on 29 June 2018, columnist and advertising executive Howard Mitchell described how he first met "the brilliant Phil Ruthven" when their businesses were both starting out. "Forty-two years later, his company, Ibis World, has a staff of 450 providing astute forecasts to business and government. Phil’s forecasts about our rapidly changing world have been a key part of my business planning for decades." 

 

The recent taxation bills in Federal Parliament generated the usual heated arguments from the benches. The legislation was in no way ‘reform’ as some claimed, since it only dealt with personal and business income tax, and the GST was left untouched. Many other indirect taxes, such as payroll tax and stamp duties, were also unchanged recently at the state level.

Income taxes versus spending taxes

The broad principle of wealth creation by going easier on taxing incomes and going harder on taxing spending has been ignored yet again. The current ratio of income taxes to spending taxes (such as GST, customs, excise and stamp duties) is over 2.5:1 in favour of income taxes on wealth creation. Hardly a recipe for higher savings and investment as a share of GDP.

So-called class warfare has become the order of the day. Is there substance to the claim that the rich are getting richer and the poor, poorer? Not quite, allowing for the changes in household structures and age groups. More on this shortly.

Wealth and income inequality in Australia

The first chart shows the latest ABS data (FY16) on income and wealth distribution as it applies to quintiles (each one fifth of all households).

Click to enlarge

Yes, the richest and well-off 40% of all households enjoyed 71% of gross incomes and had 83% of the wealth (net worth). But they paid 87% of all income taxes, and the remaining 60% of all households paid 13% of all income taxes. This diluted the disposable income shares of the affluent 40% from 71% to 63%, and lifted the struggle and poorest 40% of households from 13.4% of gross incomes to over 20%.

So, are the poor getting poorer?

Interestingly, no. The next chart shows the changing distribution of gross incomes over the past 20 years. The Struggle and Poorest sectors have kept the same share, virtually unchanged. In disposable income terms, their higher share has also remained constant. If anything, there has been a slight dilution of the middle-income sector, but hardly anything to write home about.

Click to enlarge

Then again, we need to be careful with terms such as ‘struggle’ and ‘poor’. Lest we think of strugglers as being big families with one income, or the poor as elderly pensioners, it isn’t that simple. Among the so-called poor in both income and wealth measures, there are many students at universities with minimal incomes who have not yet had the time to accumulate assets.

Holding up the ‘middle’ quintile’s share are growing numbers of retired baby-boomers, who have had much more opportunity in salaries and wealth accumulation than older generations that experienced the Great Depression of the 1930s and World War II. This is giving them a better lifestyle via their investments. The eventual retirement of the Gen Xers (37-52 years-of-age today) will amplify this trend even more so, given their near-entire working lifetime with superannuation savings. They are more financially savvy too.

The recent tax changes have been about addressing bracket-creep and lowering corporate taxes, in line with overseas trends. The bracket creep issue has not been as great as in the past because of very low inflation and slow-growing incomes, the result of an under-performing economy over the past 10 years.

Are our corporates doing well by global standards?

Some argue that the corporate tax case was not strong considering how poorly our top corporations perform compared with our US cousins, as the final chart shows. Our profitability is half theirs.

Click to enlarge

If our big end of town wanted to make better net profits, then becoming more profitable by global standards would be better than just paying slightly less income taxes.

It seems genuine taxation reform is on the too-hard list along with other overdue reforms to the labour market, energy market, parliament (lack of the democratic-election principle with the unrepresentative Senate and its obstructionist power), and the Budget (balancing the books).

But compared with other western nations, we are still doing better, and we can preserve the moniker of the lucky country. Phew.

 

Phil Ruthven is Founder of IBISWorld and is recognised as one of Australia’s foremost business strategists and futurists.

 


 

Leave a Comment:

     

RELATED ARTICLES

If rising inequality leads to social unrest, we all suffer

Taxing the ‘rich’: the potential tax consequences of inequality

Income inequality and a crumbling model for capitalism

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.