4.5  Final incomes

Adding together market income (Figure 5) and total government benefits (Figure 10), then taking away total tax payments (Figure 13), gives final income by decile, which is shown in Figure 14. In deciles 2, 4, 5, and 7, average final income was about the same in 1997/98 as it was in 1987/88.[15] In all other deciles, average final income was higher in 1997/98. In deciles 1 and 10, households experienced the largest growth in final incomes, increasing by 46% and 34% respectively between 1987/88 and 1997/98. These deciles were also the only ones to increase their share of total final income (Figure 14, II). For the reasons given in Section 4.2, however, results for decile 1 should be treated with some caution.

Figure 14 – Final income, by income decile, 1987/88 and 1997/98

I.  Average final income ($)

II.  Share of total final income (%)

4.6  Redistribution of income

Redistribution occurs because better-off households pay more tax than poorer households, receive less of their income as cash benefits, and tend to use government services, particularly health services, to a lesser extent. Taking total tax payments (Figure 13) away from total government benefits (Figure 10) reveals the extent of this redistribution, which is shown in Figure 15. In other words, Figure 15 shows the net effect of households’ payments to, and benefits from, central government, whether these benefits are in cash or in kind.

Figure 15 – Average receipt of government benefits minus tax payments, by income decile, 1987/88 and 1997/98

In 1997/98, households in deciles 1 to 5 received more in government benefits, on average, than they paid in tax. This net “gain” from redistribution also increased from 1987/88 to 1997/98. On the other hand, households in deciles 6 to 10 received less in government benefits, on average, than they paid in tax. For deciles 6 to 9, this net “loss” from redistribution was about the same in 1997/98 as it was in 1987/88. For households in decile 10, however, the net “loss” was markedly greater in 1997/98. Overall, the average household, across all deciles, paid slightly more in tax than it received in cash or in-kind benefits. This average “overpayment”, which is an artefact of the study methodology (see Section 3.5), was $4,751 in 1987/88 and $3,770 in 1997/98.

Figure 16 depicts this redistribution in a slightly different way by showing, for both 1987/88 and 1997/98, how market income is modified by income tax payments and receipt of cash benefits to produce disposable income, and then by consumption tax payments and receipt of other government benefits to produce final income. This shows the scale of redistribution relative to market incomes, which for many deciles is considerable. The final income of a household in decile 10, for example, is on average a third lower than its market income. The final income of a household in decile 1, on the other hand, is on average nine times higher than its market income. For deciles 5 and 6, in the middle of the distribution, market income and final income are very similar, showing that these households pay as much in tax, on average, as they receive in government benefits. Individual households within each of these deciles, however, will differ in the extent to which they pay taxes and receive government benefits, particularly those benefits which are not directly linked to a household’s income, such as education and health services.

Figure 16 – Redistribution of income, by income decile, 1987/88 and 1997/98

I.  Redistribution in 1987/88

II.  Redistribution in 1997/98

Table 2 shows final income as a proportion of market income, for each income decile and in both years. In all deciles this proportion was at least as high or higher in 1997/98 as in 1987/88, and strongly so in the first five deciles.