When we talk about inequality, we tend to focus on income. After all, if some people are raking in thousands of dollars a week while others get by on just a few hundred dollars, that would seem to be a key contributor to inequality.
Income inequality is certainly an issue, with the top one-fifth of Australian households taking home two-fifths of the country’s income. But it’s actually our distribution of wealth that’s the biggest driver of inequality between the “haves” and the “have-nots”. It’s also, crucially, holding us all back from economic growth.
A report by the Australian Council of Social Service (ACOSS) and the University of NSW last year found that in Australia, the top one-fifth of households hold nearly two-thirds of the country’s wealth.
With an average of $3.25 million locked away, these households have their hands on about 90 times the amount of wealth stocked up by those in the bottom one-fifth of households.
And if we look at the number of people with “ultra-high wealth” – more than $750 million – Australia ranks fifth in the world (probably not a ladder we want to be topping).
It’s little surprise that most of the inequality in wealth comes down to our distribution of housing: especially the big gaps in the value of the family homes people own, but also the wealth held in investment properties.
But the research found shares and investment properties were the most unequally distributed forms of wealth – the top 10 per cent holds nearly two-thirds of the total value of these assets.
Many young people – especially those without family help – are locked out of home ownership, and older generations (on average) tend to be wealthier, partly thanks to rising property prices and simply the build-up of wealth over time. But there’s also a big gap in the amount of wealth held within generations.
Picture this: the average “older” household (those aged 65 and older) – are about four times wealthier than the average “younger” household (aged under 35).
But it’s actually older households that also happen to be in the top 10 per cent of all households by wealth, that hold nearly one-fifth of the country’s wealth.
It’s a different story for the one in 10 older people who rent, about half of whom live in poverty.
That might be part of the reason why so few older households pay any income tax, compared with nearly all younger and middle-aged households.
But even the wealthy older households pay very low rates of income tax: about 16 per cent on average compared, with 28 per cent for wealthy young and middle-aged households, and more than one-third of wealthy older households pay nothing at all.
Basically, as ACOSS principal adviser Peter Davidson puts it, the issue isn’t that older people are generally rich, but there’s a decent chunk of older, wealthier Australians who pay very little or no tax.
But Davidson, who helped write the report, also points out the problem is not that young people pay too much income tax. “They don’t,” he says. “And young people’s share of income tax paid is diminishing.”
According to the Parliamentary Budget Office, the share of personal income tax paid by those aged 29 and under has shrunk steadily from more than one-quarter in 1979-80 to about one-tenth in 2021-22.
So while we talk quite a bit about younger working families being unfairly punished and being heavily burdened by tax, the issue is more with the way we tax (or don’t tax) wealth.
That’s especially the case because when we talk about wealth in Australia, it’s undeniably linked to the housing market: one of the biggest drivers of wealth and wealth inequality, but also one of the biggest areas of financial stress for those who don’t already have a foothold in it (or financial help to get there).
We’re also seeing a worsening of inequality within the younger household demographic. Not only do they have less wealth on average than older generations, but also the most unequal distribution of wealth within their age group.
The bottom 60 per cent of younger households by wealth, for example, have only about $80,000 in wealth each. Meanwhile, the wealthiest 10 per cent have more than $2 million each stashed away on average, meaning they account for more than half of the entire wealth of that age group.
“It is likely that transfer from parents [the bank of mum and dad] contributed significantly to this concentration of the wealth of young households in the hands of the highest 10 per cent,” the authors of the report said.
A lot of the wealth difference comes down to some people owning their own homes while most don’t. Very few of the bottom 60 per cent of younger households own their own home.
As older generations die and pass on their wealth, this gap will grow. From 2003 to 2022, the share of wealth held by the top 10 per cent has grown, while the wealth of those in the bottom 60 per cent fell.
Davidson says the problem areas are obvious: taxation of super, capital gains and private trusts, which tend to be taxed at lower rates or present tax loopholes.
The government’s decision to raise the discounted rate of tax (from 15 per cent to 30 per cent) on earnings from super balances over $3 million is a good start.
But we should also extend the 15 per cent tax on income from superannuation investments so that it applies to those who are retired. Currently, once people are retired, they can withdraw money from their super tax-free.
We also need to fix the way we tax housing to discourage – or at least stop encouraging – much of the speculative investment which tends to inflate home prices. That includes curbing negative gearing and reducing the 50 per cent capital gains tax discount to a rate closer to the rate of inflation.
Allowing – and encouraging – wealthy people to lock away their wealth, especially in things such as existing housing, worsens inequality and pushes home ownership further out of reach for many Australians. But it also reduces the potential of our economy by directing money away from more productive uses, such as investment in education or innovation, and encouraging wealth accumulation over work.
If we want a fairer society – and a stronger economy – we need to make sure wealthy Australians are paying their fair share and that we’re giving everyone a fair go.
