The last word

For all our egalitarian tendencies, Australians appear keen to understand the super-rich. From Lifestyles of the Rich and Famous to the BRW Rich 200 list, we seem to have a national thirst to learn more about our most affluent citizens.

But knowing how much of our national income goes to top income groups is more than mere voyeurism. With money comes economic power — and, potentially, the ability to affect political outcomes.

In an instrumental sense, societies with more inequality tend to have worse health outcomes, more crime, and be less trusting of one another. In a more philosophical sense, there is a risk that inequality may split us into ‘two Australias’, occupying separate spaces, using different educational, health and transport facilities, and existing independently of one another.

In an analysis of top income groups in Australia over the 20th century, co-authored with Sir Anthony Atkinson, of Nuffield College, Oxford, we used data from tax returns to calculate the earnings of the richest groups, such as the top 10 per cent, one per cent, and 0.1 per cent. Since 1921, data from federal income tax returns has been tabulated on an individual basis by the Australian Taxation Office. Since not everyone pays tax, we then calculate the national personal income — the total amount that would have been reported to the tax office if every adult had filed a tax return. This allows us to determine the share of the richest groups, and see how this has fluctuated from 1921-2000.

Over the period from 1921 to 1980 the share of income held by the top groups fell steadily. The share of the richest one per cent of adults began at more than 10 per cent in 1921 and had fallen to under five per cent by 1980. Over the same sixty-year period, the share of the top 0.1 per cent fell from nearly four per cent to one per cent. In the middle of the prime ministership of Malcolm Fraser, Australian top income shares were at their nadir.

There were of course some fluctuations around this broad downward trend. Top income shares fell sharply during the Great Depression, but rose modestly in the post-depression 1930s. The income share of the richest dropped during World War II, but rose again after the war (the shares in 1939 are similar to the shares in 1948). And the wool boom of 1950-51, induced by the Korean War, caused a substantial spike upwards in top income shares.

In 1980, the pattern reversed — with the shares of the richest groups growing steadily during the 1980s and 1990s. By 2000, the richest 10 per cent of Australians had 32 per cent of all personal income, the richest one per cent had nine per cent, and the richest 0.1 per cent had three per cent. The income share of the richest groups in 2000 was higher than it had been at any point since the Korean War.

These trends accord with what we can glean from other sources. For example, the wage paid to top public servants (as a fraction of average earnings) declined from 1926 to 1989, but rose through the 1990s. The salary paid to High Court judges (again as a fraction of average earnings) similarly declined from 1930 to 1985, and has since risen steadily. In 1992, the earnings of a typical executive in one of Australia’s top 50 companies was 27 times the wage of an average worker. By 2000, this had risen to 77 times the wage of an average worker (suggesting that CEO pay may be a significant factor explaining the rise in top Australian incomes during recent decades). Analysing wealth data, the share of national wealth held by the richest 200 Australians rose from one per cent in 1984 to two per cent in 2000. And in separate work I have done on income inequality among male adults from 1942-2000, the same patterns emerge.

The path of top income shares in Australia has much in common four other Anglo-Saxon countries: Canada, New Zealand, the United Kingdom and the United States. As we show in our comparison of these five Anglo-Saxon countries, each saw a decline in top income shares in the three decades after World War II, followed by a sharp rise from the mid-1970s onwards.

What might explain the changes? Discussing changes in top income shares in the United States, Thomas Piketty and Emmanuel Saez speculate that the internationalisation of the market for chief executives and changing norms about inequality may explain part of the increase.

Looking at the five Anglo-Saxon countries, Atkinson and I find that changing marginal tax rates are also particularly important. The wage earnings of the rich are highly responsive to marginal tax rates on earned income via an incentive effect. Moreover, higher marginal tax rates on investment income reduce the amount the rich are able to invest in successive years, and therefore reduces their share of national income. Over the past three decades, Australia’s top marginal tax rates have steadily fallen — from 69 per cent in 1970 to 60 per cent in 1980, and 47 per cent since 1990. While there are good economic reasons for reducing the top marginal rate, one consequence has been to increase the income share of the very richest.

Dr Andrew Leigh is a fellow in the Social Policy Evaluation, Analysis and Research Centre in the Research School of Social Sciences.