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Constructing the Lorenz Curve and Calculating the Gini Coefficient for
Australia from 2017-2018 ABS data. And Speculation on the increasing level of
inequality in Australia

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DOI: 10.13140/RG.2.2.26807.88485

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 Constructing the Lorenz Curve and
Calculating the Gini Coefficient for
Australia from 2017-2018 ABS data.
And
Speculation on the increasing level of
inequality in Australia

By

Brown Cat

browncat@browncat.com.au

Key terms: Income inequality; Lorenz curve; Gini

coefficient; Piketty; Inequality in Australia.

Contrary to the commonly held myth of Australia as being

an egalitarian society; the ‘lucky country’1 where mateship
and the ‘fair go’2 prevail; Australia is actually amongst those
less-equal societies within the OECD3 group of nations. In

1
This term “The Lucky Country” is taken from Donald Horne’s book of the same name (Horne, D. (1964) The
Lucky Country. Peng Mod Classics. Reprint, 2008. ISBN.978-1-74253-157-1) and was intended as a critical
descriptor as Horne believed that Australia’s apparent good fortune, at that time, its wealth and stable
institutions, had resulted more from good luck rather than by being nurtured through good management.
However, the term ‘lucky country’ became captured, redefined and then used to commonly present Australia
in a generally positive light.
2
The term ‘fair go’ has been argued to come from the arrest of strikers opposing strike-breakers during the
shearer’s strike of 1891, it was a common practice to subject strikers to arbitrary arrest and detention and in
an age where workers were less literate than now, the statement ‘a fair go’ reflected the belief that those
being arrested had the right to have the warrants for their arrest read in public before being summarily
detained. Meanings and origins of Australian words and idioms,
http://slll.cass.anu.edu.au/centres/andc/meanings-origins/f. Accessed 3/1/2019.
3
The OECD is the Organisation for Economic Cooperation and Development. http://www.oecd.org/about
(accessed 1/10/18). Its mandate is to promote policies that will improve the economic and social well-being of
Australia in 2017-2018, the lowest quintile grouping (the
income poor) shared just 7.4% of the Equivalised Disposable
Household Income4, compared to 12.5% for the next quintile
(the “near” income poor), 17% for middle quintile income
earners, 22.7% for the “near” income rich and 40.4% for the
top quintile group (the income rich). The Gini coefficient on
income was 0.328. The Gini coefficient is a unit independent,
statistical measure of equality (or inequality). A Gini
coefficient of zero would represent perfect equality, while the
maximum inequality is one.

Objectives

• The goal of this paper is to show in mathematically

simple terms how a Lorenz Curve is constructed using
the most recently available Australian data (2017-2018)
• To calculate the Gini coefficient manually using the
basic geometry of the Lorenz curve as a simple
approximation to the recent estimation of 0.328 in
Australia in 2017-2018.
• Discuss recent speculation about the causes of rising
inequality in Australia.

people around the world, particularly for those member countries and other nations participating in their
programmes. The OECD is often referred to as the “rich countries club”.
4
Equivalised household disposable income is defined as the total income of a household, after tax and other
deductions, that is available for spending or saving, divided by the number of household members converted
into equalised adults; household members are equalised or made equivalent by weighting each person’s
income according to their age using the so-called modified OECD equivalence scale. OECD, (2009) What are
equivalence scales? OECD Project on Income Distribution and Poverty. Mimeo. The ABS utilise the OECD-
modified equivalence scale which assigns a value of 1 to the income of the household head, 0.5 to the income
of each additional person 15 years or older and 0.3 to the income of each child under 15 years. The purpose of
equivalising households is to reflect the economies of scale available when adults or families live together
(compared to living in a single adult household). In addition, it is important to remember that Equivalized
Household Disposable Income (EDHI) is a disposable income concept (i.e., after taxation) and has been
adjusted from gross income to include Social Assistance Benefits (SAB) in cash, imputed rents (IR) and social
transfers in kind (STIX) (ABS, Household Economic Wellbeing, Fact Sheet One).

Robert Murray (HDR) 2

If income earned simply follows the vagaries of the market
place, and since most of the income poor are outside the
market place, deriving their income solely from a pittance of
government transfer payments, then the objective of
attaining a socially optimal level of inequality won’t be
resolved through market forces alone. Only the government,
in Australia, through redistributive policies, has the
necessary ability and legislative scope, if not the will, to
redress income inequality and inequity within Australian
society.

The Lorenz Curve

Different techniques are available to measure the inequality

in the distribution of income (or similarly, the distribution of
wealth). However, the most common visual technique used is
to draw the Lorenz curve, as first proposed by the American
economist Max Otto Lorenz in 19055, and which, in general
terms, shows the cumulative percentage relationship
between two variables. The Lorenz curve has, in addition to
income distribution, also been applied in other areas of
economics, for example, in microeconomics, as a measure of
market concentration (showing the cumulative percentage
market share held by the relevant cumulative percentile
groupings of firms).

5
Lorenz was able to clearly demonstrate by using his curve that there was a greater concentration of wealth in
Prussia in 1901 than had been the case in 1892. Lorenz, M. (1905). Methods of measuring the concentration of
wealth Publications of the American Statistical Association. Vol. 9 (70) 209–219. doi:10.2307/2276207.

Robert Murray (HDR) 3

The easiest way of understanding what the Lorenz curve
shows is to focus on the line of perfect equality of income (or
wealth, when concentration in the distribution of wealth is
being measured) which is the 45-degree line dividing the box
diagram into two triangles of equal area. In Fig1, this is the
blue line. Observe that the vertical axis measures the
cumulative percentage of income held. While the horizontal
axis shows the various quintile groupings of Australian
households. A quintile group is 20% of persons, in this case,
of equivalized Australian households surveyed.

The first quintile group (the lowest 20%) are the income
poor6. This means that they are necessarily impoverished
(living in poverty by some accepted measure, with respect to
income share), however, some proportion of those households
may also be asset rich while also being income poor. For
example, pensioner owner-occupiers of housing; or some
farmers in a time of relative drought or flood. They may
additionally be maintaining their lifetime (or permanent)
consumption level by dissaving from past incomes rather
than just determining their current consumption as a
proportion of their current income7. But for the most part
those who are income poor are also holding no or very little

6
This lowest quintile group (the income poor) will include many of those living in poverty. In Australia the poor
are regarded as “relatively” poor (e.g., those belonging to a household where the household income is less
than 50% of the median household income) though their deprivations are often ‘real’ enough. The income
poor (lowest 20%) are also poor as defined by the OECD definition of “anchored poverty”. In effect, anchored
poverty, looks at how the poor are doing now compared to a designated “sunnier times” median income level
(such as that before the Global Financial Crisis (GFC) of 2007). Poverty can also be defined in non-monetary
terms; i.e., in terms of people’s ability to meet their basic needs, such as nutrition, and their access to basic
services, such as health services, clean water, electricity, schooling and the internet. The Oxford University’s
research centre, the OPHI, maintains a Global Multidimensional Poverty Index of this kind. However, Australia
has not officially adopted any poverty line measurements.
7
Italian economist Franco Modigliani is most frequently credited with the hypothesis that consumers aim for a
stable level of consumption throughout their lifetime by saving during their working years and then spending
(i.e., dissaving) during their retirement. Modigliani, F. (1966). The Life Cycle Hypothesis of Saving, the Demand
for Wealth and the Supply of Capital. Social Research. 33 (2): 160–217. JSTOR 40969831.

Robert Murray (HDR) 4

wealth, as wealth is even less equally distributed than
income. Nor is it true that the same households will remain
in the lowest quintile grouping for their entire life-cycle,
though many do. Income earned, however, for the most part,
tends to follow a life-cycle pattern even at relatively low
levels of income. For many income earners, particularly
those who are able to participate in the market, they will
only be in the income poor quintile during their youngest
working years and during their advanced age.

If income were equally distributed, then the bottom 20% of

income earners would literally receive 20% of the national
income (or hold 20% of the wealth). This point is denoted on
the line of equality by a red dot at the coordinates (20%,
20%) in Fig 1. Similarly, for income equality, 80% of the
households would receive 80% of the household income (also
shown as another red dot on the blue line of equality (80%,
80%). Since all (100%) of the households must have 100% of
the income, the actual Lorenz curve (red curve) must pass
from the bottom (south-west) corner (0%, 0%) of the graph
and curve on up to the top (100%, 100%) (north-east) corner
of the box.

Robert Murray (HDR) 5

 Fig 1

Lorenz Curve for Australian Equivalised Disposable Household

Income 2017-2018
100.0%
100%
100%

80%
80%

60% 59.6%
60%
Percentage

40%
40% 36.9%

20% 19.9%
20%

7.4%

0.0%
0%
0%
0% 20% 40% 60% 80% 100%
Qintile Group

Lorenz Curve "Line of Equality

Now suppose that income is less than equally distributed,

which, indeed, it is. In Australia, in 2017-2018, the income
poorest first quintile had not 20% but a meagre 7.4% of
household income8. You can see this point marked (as a blue
dot) on Fig 1 and it lies well below the line of equality9. The
next, second quintile group, the income near-poor, have just
12.5% of the 20% of household income they need to achieve
complete equality. However, because the Lorenz curve shows
8
ABS65230do001_201718 Household Income and Wealth, Australia: Summary of Results, 2017–18.
9
The calculated proportion is 7.5%, however, this is rounded to 7.4% by the ABS. So, on the Lorenz curve this is
shown as 7.4% to assure the quintile cumulative percentage adds up to 100%. The adjustment, if any is
necessary, is always applied to the lowest income quintile by the ABS.

Robert Murray (HDR) 6

the cumulative percentage of income received, the
appropriate point is seen at (7.5% + 12.5% =) 20.0%. The
third quintile, the middle-income quintile, has 17% (of their
20%) and their point on the curve is seen by the blue dot at
(7.5% + 12.5% + 17% =) 37%. The fourth quintile group, the
income near-rich, received 22.7% (that is, 2.7% more than
their egalitarian 20% share) and their point on the Lorenz
curve is at (7.7% + 12.5% + 17% + 22.7%) = 59.9%. The
remaining massive 40.4% of income was expropriated by the
income-rich and so their point is at 100% at the upper-right
hand corner of the graph. They share greater than twice
their egalitarian share of 20% in income. These statistics
and the calculations are shown in Table 1.

Table 1

% of
equivalised Calculation of the
Cumulative
household Cumulative
Percentage
income Percentage
2017-2018
Quintile 1, the
7.4% 7.4% 7.4%
income poor
Quintile 2, the 7.4% + 12.5% =
12.5% 19.9%
income near-poor 19.9%
Quintile 3, The
7.4% + 12.5% +
middle-income 17.0% 36.9%
17% = 36.9%
group
7.4% + 12.5% +
Quintile 4, the
22.7% 59.6% 17% + 22.7% =
income near-rich
59.6%
7.4% + 12.5% +
Quintile 5, the
40.4% 100% 17% + 22.7% +
income rich
40.4% = 100%

Robert Murray (HDR) 7

The mathematical construction of the Lorenz curve implies
that the further below the 45-degree line of perfect equality
the actual Lorenz curve lies then the more unequally income
(or wealth, if wealth is graphed) is distributed in a society.
While simply observing the non-alignment of the Lorenz
curve and the line of perfect equality will give a rough visual
guideline as to social inequality, it is also desirable to have a
precise mathematical measurement of the income (or
wealth) inequality in society. The universally recognised
statistical measurement of equality (or inequality) is the
Gini coefficient, a ratio first proposed by Italian statistician
Corrado Gini in 191210.

The Gini coefficient is a ratio of the area below the line of

perfect equality but above the actual Lorenz curve to the
triangle located above the blue line of perfect equality. In
Fig 2 this is depicted as Area Z divided by Area X. Now
assume that in an ideal world, unlike our actual dystopia,
income was equally distributed with each quintile group
receiving its 20% share. The Lorenz curve would then lie
everywhere upon the line of perfect equality and Area Z
would be equal to 0. The Gini coefficient would be;

Alternatively, with perfect inequality (Gini = 1) the Lorenz

curve would run from the origin (0%,0%) along the
horizontal axis and up the right-hand edge to the point

10
Another index of inequality, less commonly discussed, is the Theil Index (which measures the maximum
possible entropy of the data minus the observed entropy), it measures the entropic distance the population is
away from an egalitarian state.

Robert Murray (HDR) 8

(100%,100%); a right angle, Area Y would be equal to 0.
Since Area Z would then be equal to Area X the Gini
coefficient would be equal to 1.

Fig 2

Lorenz Curve for Australian Equivalised Disposable Household Income 2017-2018 100.0%
100%
100%

80%
80%

Area X
60% 59.6%
60%
Percentage

Area Z
40%
40% 36.9%

Area Y
20% 19.9%
20%

7.4%

0.0%
0%
0%
0% 20% 40% 60% 80% 100%
Qintile Group
Lorenz Curve "Line of Equality

To summarise, for perfect equality in the distribution of

income (or the distribution of wealth), the Gini coefficient
will be equal to zero. For perfect inequality in the distribution
of income (or the distribution of wealth) the Gini coefficient

Robert Murray (HDR) 9

will be equal to unity. It follows, that in any real-world
economy, including Australia, the value of the Gini
coefficient will, in all practical sense, lay at a value
somewhere greater than zero but less than one.

The equation to calculate the Gini coefficient is

mathematically sophisticated and beyond our scope.
However, its value in any case can be simply approximated
using data from the quintile (20%) groups. Observe both Fig
2 and Fig 3, carefully. Since each axis measures 100 % the
total area of the box will be 100% x 100% = 10,000 sq units.
Therefore, Area X, in Fig 2, will equal 5000 square units
(10000 sq units / 2 = 5000 sq units), since Area X is half the
box. Similarly, the area of Area Y can be calculated as the
sum of a series of triangles (in Fig 3, triangles “A” to “E”)
and a series of rectangles (in Fig 3, rectangles “F”, “G”, “H”
and “J”). The formulas to calculate the areas of triangles and
rectangles are well know and simple to use.

Robert Murray (HDR) 10

 Fig 3

Once the area of Area Y is known then the area of Area Z

will simply be;

The Gini coefficient will be;

Robert Murray (HDR) 11

To calculate the area of each triangle “A” through to “E”, the
area will be half the base times the height. Since quintile
groups are 20%, half the base is always 10%. To illustrate,
Area A = (20/2)% x 7.4% = 74 sq units. For the rectangle,
their area will be equal to their base times their height. For
example, Area F = 20% x 7.4% = 148 sq units. The results to
calculate the full Area Y are shown in Table 2.

Area Label Area (sq Calculation

units)
A 74
B 125
C 170
D 227
E 404
F 148
G 398
H 738
J 1192
Total Area 3476
Area = 20/2 x 7.4 = 77 sq units
Area = 20/2 x 12.5 = 125 sq units
Area = 20/2 x 17 = 170 sq units
Area = 20/2 x 22.7 = 227 sq units
Area = 20/2 x 40.4 = 404 sq units
Area = 20 x 7.4 = 148 sq units
Area= 20 x 19.9 = 398 sq units
Area = 20 x 36.9 = 738 sq units
Area = 20 x 59.6 = 1192 sq units
Area Y =
74+125+170+227+404+148+398+738+
1192 = 3476 sq units

The approximation to the Gini coefficient can now be

calculated;

Robert Murray (HDR) 12

This compares with the actual statistic from
ABS65230do001_201718 of 0.328

• Explaining the level of income inequality

Calculating the Gini coefficient can give a measure of

inequality in the distribution of current income at some
point in time. The time-series data can then be examined. In
Australia, there has been rising income inequality since the
1980s as indicated by a rapidly rising Gini coefficient. The
ABS (income survey) data shows income inequality
increasing dramatically up to the global financial crisis
(GFC) of 2007 after which it has plateaued due to low
growth in the Australian economy. However, the survey data
has only been available since 1994-95 and there has been a
significant change in the income definitions over that time.

Robert Murray (HDR) 13

 0.336
0.333
0.329

0.323
0.320

0.314
0.310 0.311 0.309
0.306
0.302 0.303

0.296
0.292

Source data: ABS65230do001_201718 Household Income and Wealth,

Australia: Summary of Results, 2017–18.

However, why should we expect a priori for there to be any

trend or relentless movement in the Gini coefficient over
time? In 1955 Simon Kuznets published an influential paper
in which he suggested that in any industrializing economy,
inequality would at first increase but then decrease after
economic maturity; the path of the Gini tracing out the
shape of an inverted ‘U’. However, recent changes towards
more inequality in many mature economies, including
Australia, have broadly suggested that Kuznets’ optimism
may have been unwarranted, a ‘fabrication’ of the long boom
(1944-1980) that followed the Thirty Years War (1914-

Robert Murray (HDR) 14

1945)11, and that a seeming trend away from the extreme
Dickensian inequalities of the nineteenth century is far from
inevitable. Piketty (2017), developed an alternative
perspective to the Kuznets curve. He asserts that inequality,
in a society will increase whenever the rate of return on
capital (r) is greater than the rate of economic growth over
the long term (g). The result of substantive r>g is an
increasing concentration of wealth (and income) in the
hands of the rentier class, and this unequal distribution of
wealth (and income) can eventually be the roots of social
chaos generating economic and political instability12.

Piketty’s conclusions are based on extensive empirical study

of the historical evidence over several European economies
for one or more centuries. He proposes a stylized historical
account of the recent evidence from movements in the Gini
coefficient for those countries extending over several
historical epochs. The first period spans from the conclusion
of the Franco-Prussian war (1870-71) up until the guns of
August 1914, often called “la belle époque”, but which was a

11
The term “30 years’ war” can be used to describe the period from 1914-1945 which began with world war
one (WW1) and ended with world war two (WW2). While many historians keep these wars separate and,
whatever the causes of the first war, it’s clear that the second world war occurred because of German ongoing
demands to undo the unfair provisions of the Treaty of Versailles (1919); and so, Germany progressively
demanded the piecemeal return of land that had been handed over to the allies beginning with the de-
occupation of the Ruhr (1925) and culminating with invasion of Poland (1939) which would have returned
some areas of East Prussia. These borders with Poland had been left mailable by the Locarno Treaties (1925)
and Germany wanted to undo what it saw as the imposition a patchwork, ad-hoc nation. The interregnum
period between the two wars was also punctuated with ongoing wars including the German intervention into
the Spanish Civil War (1936-1939). Hitler's policies were openly stated in his book "Mein Kampf" in 1924 where
he promised to destroy the Treaty of Versailles and to reunite all the German speaking people into a Greater
German Confederation. Since dissatisfaction with the outcomes of WW1 were the underlying cause of WW2
then we may as well refer to this 1914-1945 period as a single 30 years’ war. Winston Churchill had used this
term (that had been originally coined by Sigmund Neumann) in his book “The Gathering Storm” (Churchill, W
(1948) The Gathering Storm. Houghton Mifflin Co. ISBN-13: 978-0395410554).
12
“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the
nineteenth century and seems quite likely to do again in the twenty- first, capitalism automatically generates
arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic
societies are based.” Piketty, T. (2017) Capital in the Twenty-First Century, Harvard University Press. P1.

Robert Murray (HDR) 15

period characterized by substantial inequality and inequity.
During the following period, that of the Thirty Years’ War
(1914-1945), which began initially with The Great War of
1914-191913, there was a substantial move towards
increased equality that flowed from the destruction of
physical capital assets during the warfare. The poor were
not lifted-up, but the rich were compressed down, thus
reducing the Gini coefficient and increasing apparent
equality. Similarly, the German inflation (1921-1923)
destroyed the savings of the German middle class but
harmed the poor less as they had no savings. Likewise, the
Great Depression (1929-39) both destroyed capital and
discouraged private investment. However, again, the poor
were harmed relatively less as they typically do not
participate in the market and have no jobs to lose during a
recession. Again, it was the high-income earners being
pushed down without the poor necessarily being lifted-up.
Lastly, the second world war (1939-194514) closed out the
period with further destruction of world capital. By the time
of the Bretton Woods conference (1944) many European
countries were shown to be already experiencing
significantly lower Gini coefficients compared to la belle
époque.

13
While many hostilities, in the west, ended in November 1918 the Treaty of Versailles was not officially
signed till June 1919. Nonetheless, hostilities (interventions) in the east of Europe continued, in particular the
intervention by the U.S. and allied troops (including Australian forces) in support of various “white” factions in
the Russian Civil War.
14
While these are the dates commonly given for the second world war there had already been substantial
fighting in China, against the Japanese, particularly after 1937.

Robert Murray (HDR) 16

The post Bretton-Woods period (after 1944) saw social
democratic regimes elected in many countries of Europe
whose policies of nationalisation, progressive taxation and
increased welfare benefits kept the Gini coefficient falling
even lower than it had been in the previous period. In 1945
the Attlee Labour government was elected in the UK and in
Australia the Chifley Labor government was returned to
power in 194615. These governments, and their like,
undertook programmes of significant social reform in the
post-war period. In addition, countries such as Australia,
New Zealand, Canada and the United States of America
undertook substantial immigration programmes that both
promoted economic growth and kept a lid on domestic wages.
This post-war period, the thirty years between 1945-1975
are commonly referred to as “Les Trente Glorieuses” (“the
thirty glorious” years) although they were not glorious for
everyone.

The graph of the Gini coefficient for Australia (1942-2013)

shows clearly a pattern common to many developed
countries in the post-war period. The Gini reaches its lowest

15
In 1946 the Australian government held a referendum to validate and solidify its powers in the area of social
security. This was followed by the Social Security Act of 1947 that brought together the various ad hoc
components of social security under a common government department.

Robert Murray (HDR) 17

point in 1979. After that, it rises consistently up until the
global financial crisis (GFC) of 2007. Since then it has
plateaued as the performance of the Australian economy has
been weak. The data used in the curve below are drawn from
an analysis of ATO16 taxation data and are strictly not
compatible with the income definitions used by the ABS
(income) survey data discussed above.

Data source: Kennedy, T. (et al) Does income inequality hinder economic growth? New evidence
using Australian taxation statistics. Economic Modelling. (65), 119-128. 2017.
http://dx.doi.org/10.1016/j.econmod.2017.05.012. Table A1, P126-12717.

Piketty refers to this most recent historical period 1979-2007

(and later) as a period of patrimonial capitalism. Piketty
believes that the overall pattern of behaviour, in inequality,
in this period, is determined by political structures rather

16
The ATO is the Australian Taxation Office. (https://www.ato.gov.au, accessed 24/1/2020).
17
The large spike in the 1950’s is associated with the high wool prices of the boom coinciding with United
Nations (i.e., United States) intervention into the Korean Civil War (1950-1953).

Robert Murray (HDR) 18

than economic factors. The thirty years war kept the Gini
coefficient lower by destroying physical capital, and the
period of “the long boom” (1944-1979) saw social policies of
redistribution, principally progressive taxation, and
inclusive social welfare programmes designed to promote
equality. However, the period of the 1980s saw broad,
unrelenting attacks on the welfare state, particularly in the
English-speaking world (where "la maladie anglaise"
prevailed). Policies such as privatisation, deregulation,
commercialization and demutualisation saw inequality
increase substantially. National leaders such as Thatcher,
Reagan, Pinochet and Keating oversaw an aggressive
winding back in the size of the public sector and a return to
a reliance principally on market forces in resource
allocation. These incursions included attacks on welfare
benefit recipients who were frequently characterised as
being lazy and undeserving. As a result, benefits became
much more highly targeted and this narrowing of scope
helped to further undermine the broad-based support for the
welfare state that had existed in Australia immediately
after world war two. In Australia, certain recipients, the
unemployed and single-parents, who are frequently
portrayed as being in reduced circumstanced by their own
choice or through their own fault, are paid welfare benefits
at a lower parsimonious rate compared to the aged18 or
infirm. In addition, booms in incomes, particularly the
18
The current Newstart Allowance is set at $550.20 per fortnight for a single adult with no children
(https://www.humanservices.gov.au/individuals/services/centrelink/newstart-allowance/how-much-you-can-
get, accessed 20/12/2018). A single parent receives a maximum payment of $768.50 per fortnight (including
supplements) for a single adult (https://www.humanservices.gov.au/individuals/services/centrelink/parenting-
payment/how-much-you-can-get, accessed 20/12/18). On the other hand the single age pension is $834.40
per fortnight ($916.30 after supplements) for a single adult
(https://www.humanservices.gov.au/individuals/services/centrelink/age-pension/eligibility/payment-rates,
accessed 20/12/2018).

Robert Murray (HDR) 19

resources boom that occurred prior to the 2007 GFC saw a
“trickle-up” effect where the benefits from the increased
market generated incomes accrued significantly to the
income rich rather than being dispersed or precipitating a
supposed “trickle-down” effect to the income poor. It seemed
that “a rising tide” doesn’t “lift all boats”.

Another characteristic of the post-war period had been a rise

in the proportion of owner-occupiers (in housing). Many
governments, including the Australia government, gave
preferential tax treatment and also preferential interest rate
treatment to owner-occupiers. They were exempted from
capital-gains tax (when selling their principal residence),
and also avoided taxes on imputed rent19. During the 1970s
this favourable treatment allowed owner-occupiers to protect
their investment from higher inflation and in most cases
also high interest rates. However, in many countries since
2008, including Australia, the proportion of owner occupiers
has been falling relative to the number of properties in the
hands of rentiers. Many Australians who regarded
themselves as middle-class by virtue of aspiring to home
ownership and market participation are now forced to accept
that home ownership will be beyond their means given the
declining real value of wages and with higher housing asset
prices particularly in the major cities of Sydney and
Melbourne. Commentators have referred to this
phenomenon as “the destruction of the middle-class”20.

19
Nonetheless, some countries in Europe do charge taxation on the rental value of owner-occupied dwellings.
An imputed rental tax would recover the tax payable on the rental income that could be earned by the owner
if they rented out their residence rather than occupying it.
20
Stasch, S. (2018) The Creation and Destruction of the Great American Middle Class: 1930-2010, Loyola
University Chicago. Mimeo. Pressman, S. (2015) Understanding Piketty’s Capital in the Twenty-First Century
London, Routledge. 196 pp., ISBN 978-1-138-93975-2.

Robert Murray (HDR) 20

Piketty (again) argues that when the rate of return on
capital (r) is greater than the rate of economic growth (g)21
then income and particularly wealth becomes more centrally
concentrated into the hands of the obscenely rich (the so-
called one-percenters). In the long term, Piketty asserts,
that as the economy tends to a steady-state and population
growth tends to zero, the economy will grow only at a
steady-state rate of about 1-2% while the rate of return on
capital will tend to (about) 5%. Income inequality and
inequity will continue to rise and a class or idle rentiers
(those top 1%) will emerge who control most of the income
and wealth. The path to wealth will return to that more
characteristic of the 19th Century, that is, people will become
wealthy mainly through inherited wealth or patrimony. The
patriarchs will live principally indolent lives detached and
alienated from the living experiences of ordinary people. At
its worse such patrimonial capitalism erodes the social fabric
of society and undermines the support for an inclusive
democracy. Given these social conditions economic and
political instability could follow.

Consider the diagram below where (on the right) there is a

trade-off between efficiency and equity. A social equilibrium
is indicated by  where the trade-off curve is just tangential
to the highest attainable social welfare function. If in the
long run r remains greater than g and neo-conservative
policies push the economy towards  (on a lower social
welfare function and with lower equity), then, Piketty
argues, there is a trade-off between efficiency and stability
(shown by the curve on the left-hand side). As efficiency

21
Piketty refers to this as “Capitalism’s central contradiction”.

Robert Murray (HDR) 21

increases then economic and political instability result (a
movement from b to d, on the horizontal axis). At some
tipping point the support for democratic institutions may
collapse.
The Efficiency Instability (trade-off) Function

Piketty argues that there is a need to return to a system of

progressive tax structures in order to remediate this
increasingly perilous situation. Both income and wealth
should be significantly taxed22.

However, not all authors concur that the income inequality

problem has worsened significantly in Australia. For
example, Fenni and Tapper (2015) find that overall there
has been far less of a rising inequality trend than is often
assumed or argued. However, this mainly becomes an
argument about how inequality should be defined.
Nonetheless, the consensus is that, in Australia, income
inequality is rising to a greater or lesser degree.

22
The easiest time to tax wealth is at death. Death duties were previously payable in NSW; however, these
were abolished in 1981. Piketty argues that progressive rates of up to 70% (or higher) would be necessary.

Robert Murray (HDR) 22

In conclusion, the Australian data shows an increasing
inequality of income consistent with that currently also
observed in many other developed OECD economies.
However, the causes of this rising inequity have not yet been
irrefutably identified in the literature. If income inequality
can be largely explained by the distribution of market
incomes and if distributional inequality is therefore a gift we
inevitably inherit from the impersonal forces of the invisible
hand, then we cannot therefore just leave it to market alone
to self-correct and redress the profound distributional
inequities and restore the fairness expected in an egalitarian
Australian society. In fact, another return to economic boom
and higher economic growth would see inequality increase
even further through the “trickle-up” effect. If Piketty’s
historical analysis is correct, then we should accept his
conclusions that there should be a return to effective
progressive taxation of both income and wealth in order to
prevent a steady state equilibrium in which wealth and
income become highly concentrated into the hands of a
rentier class whose indolence and indifference to the
conditions of the poor may eventually result in the collapse
of democracy.

Robert Murray (HDR) 23

• BIBLIOIGRAPHY

Fenna, A and Tapper, A (2015) Economic inequality in Australia: A

reassessment, Australian Journal of Political Science, 50:3, 393-411,
DOI: 10.1080/10361146.2015.1066309

Herault N, Aziptarte F. (2015) Recent Trends in Income

Redistribution in Australia: Can Changes in the Tax-Benefit System
Account for the Decline in Redistribution? Economic Record. (91) 38–
53. doi: 10.1111/1475-4932.12154

Horne, D. (1964) The Lucky Country. Peng Mod Classics. Reprint,

2008. ISBN.978-1-74253-157-1

Kennedy, T. (et al) Does income inequality hinder economic growth?

New evidence using Australian taxation statistics. Economic
Modelling. (65), 119-128. 2017.
http://dx.doi.org/10.1016/j.econmod.2017.05.012

Kuznets, S. (1955). Economic Growth and Income Inequality. The

American Economic Review, 45(1), 1-28. Retrieved from
http://www.jstor.org/stable/1811581

Leigh, A. Deriving Long‐Run Inequality Series from Tax Data.

Economic Record. (81) S58-S70. 2005. https://doi.org/10.1111/j.1475-
4932.2005.00244.x

Lorenz, M. (1905). Methods of measuring the concentration of wealth

Publications of the American Statistical Association. 9 (70), 209–219.
doi:10.2307/2276207

Modigliani, F. (1966). The Life Cycle Hypothesis of Saving, the

Demand for Wealth and the Supply of Capital. Social Research. 33
(2): 160–217. JSTOR 40969831

Piketty, T. (2017) Capital in the Twenty-First Century, Harvard

University Press. 2014. ISBN 978- 0- 674- 43000- 6.

Pressman, S. (2015) Understanding Piketty’s Capital in the Twenty-

First Century. London, Routledge. 196 pp., ISBN 978-1-138-93975-2.

Robert Murray (HDR) 24

 Saunders P, et al, 2018. Inequality in Australia. Australian Council
of Social Service. Mimeo. ISBN: 0 85871 081 1

Stasch, S. (2018) The Creation and Destruction of the Great

American Middle Class: 1930-2010, Loyola University Chicago.
Mimeo

• STATISTICAL SERIES

ABS65230do001_201718 Household Income and Wealth, Australia:

Summary of Results, 2017–18

ABS5206.0:A2303803V Australian National Accounts: National

Income, Expenditure and Product

ABS6202.0:A84423134K Labour Force – Australia

ABS6401.0:A2325850V - Consumer Price Index, Historical Weighting

Patterns, 1948-2017

Robert Murray (HDR) 25

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