Inequality and Optimal Top Income Tax in Australia

Abstract

Inequality is a widely discussed topic and common phenomenon all over the world. This report provides a board view of inequality in Australia, which has top rank equality among 35 OECD countries. Although inequality has been upward trending for all over the world include Australia. For various inequality indicators, the inequality upward trends have been witnessed. Tax policy has been one of the most effective tools used by government to tackle this inequality problem, the main idea is to redistribute the wealth of the society to achieve higher utility. Different tax rates have been imposed on different income classes for the purpose, optimal labour income taxation theory by Diamond and Zaez'11 has been applied in the report to determine the theoretical optimal rate for Australia, the theoretical optimal tax rate for top 4% income class is 0.49 with a 0.5 elasticity, and theoretical rate in this report is actually higher than the actual rate, suggesting the Australia government could raise the tax rate to reduce inequality. A further step to take is investment in education system because the educational attainment is highly persistent and education is one of the key reasons for higher income.