There are many forms of taxation in Australia, which are monetary transfers from the household and business

sectors to the government sector. These payments contribute towards the amount of government expenditure each year. Income taxes are the most significant form of taxation in Australia, which contributed 39% to the total taxation revenue during the year 2011-12 (ABS, 2013). This type of tax is also able to affect the inequality of income. The reason for this is due to the progressive nature of this tax, which suggests that higher rates of taxation apply to higher income earners, which is shown in the diagram where it can be seen that as an individuals income increases, the tax rate will increase also. In addition, individuals with taxable incomes less than $18,200 are exempt from tax paying which allows these low income earners to be able to keep what they earn, which means that the burden of tax is not placed onto their relatively small amount of taxable income. However, the tax-free threshold may affect these individuals incentive to seek jobs with higher income since any extra dollar earned about $18,200 will result in an increase in the amount of tax they pay as well as the rate at which they pay tax. This negative incentive may exacerbate income inequality as low income earners may wish to stay where they are rather than earn a little more and being eligible to pay tax. As the current trend in the average labour force earnings have been upwards where the rate of growth has been higher for the higher quintiles of the income distribution rather than the lower quintiles of the income distribution as according to a paper released in 2013 by the Australian Productivity Commission. Furthermore, there are loopholes in this type of taxation that may allow for the continuing disparity of income between high income earners and low income earners. This can be seen through the data from the Australian Taxation Office, where it revealed that 70 Australians with incomes of more than $1 million each between 2010 and 2011 managed to not pay any income tax. The reason this is possible is because they were able to claim tax deductions that reduced their taxable income to less than the tax-free threshold. Since the large amount of income they earn are not being taxed on, governments may have less amount of expenditure to spend on welfare payments, which indicates that the financial support provided for low income households will be reduced and that the governments ability to redistribute income may become less effective. Therefore, as a result, the reduction in this source of income may allow for the increase in the level of inequality of income. This reduction may also mean that individuals and households who rely on welfare benefits to be financially burdened, and so the incentive to create savings for the purpose of making an investment in the future, as a means of accumulating wealth, may be decreased. A form of taxation that can affect the level of inequality of wealth is the goods and services tax (GST). This is due to the regressive nature of this indirect tax, where an additional 10% of the purchase price of most goods and services is implemented. The nature of this tax suggests that those who have lower disposable incomes will be obliged to pay the same amount of tax for the same goods and services purchased, which indicates that there will be a more pronounced effect on lower income earners since this tax will consume a higher proportion of their income in comparison to high income earners. This suggest that these individuals and households will have less amount of disposable income that can be allocated to savings which may be used as a means of accruing wealth. Therefore, a greater inequality of wealth may result. This result in terms of wealth may be exacerbated as it has been suggested that 70 per cent of very low income earners spend more than 30 per cent of their pay on rent, where rent has increase on average about 49 per cent in the past five years, which makes it difficult for low-income earners to find affordable housing (Paull, 2012). Another form of indirect tax that is regressive is the excise duties which increases the price for goods such as cigarettes and alcohol. This suggests that individuals belonging to the low income bracket

will be required to pay the same amount as a high income earner, with the latter possibly not being affected greatly since a relatively smaller proportion of their disposable income will be consumed. In the proposed Budget for the year 2013-14, the average cost of a basic packet of 25 cigarettes will increase by 7 cents in the first half of next year (Sydney Morning Herald, 2013). If the same amounts of cigarettes are used by low income earners as with high income earners, an increase in income inequality will ensue. This sort of situation may be evident in Australia, where almost one in six Australians of working age is reliant on income support where those who are long-term dependent on welfare, which suggests that they are the individuals that are in the lowest quintile of Australias income distribution, Since smoking is considered a type of addiction, the demand for cigarettes may be inelastic so this tax may not achieve its main intention which is to be implemented as a means to encourage individuals to quit smoking. In addition, the excise tax imposed on alcohol may also allow for the increase in income inequality. This is because of the research that has shown that those who are long-term dependent on welfare due to being in the low income bracket, are associated with having alcohol addiction (Brown, 2010), which implies that these particular individuals have a larger proportion of their disposable income allocated for the consumption of alcohol. In conclusion, although the progressive nature of income taxation may allow for income inequality to narrow, the loopholes that are associated with this form of taxation may suggest otherwise. Furthermore, the use of indirect taxation which are regressive in nature such as the goods and services tax and the