Ozblogger Gianna points to this report in the Australian and suggests that it falls to me to sort it out. Looking at the thinning ranks of Australian econobloggers, she’s probably right.
The report is based on a Labor press release which appears to be based on the income tax statistics for 1999-2000 and 2000-01. The central claim
JOHN Howard’s battlers are going backwards, with new tax research showing that lower and middle-income earners suffered a reduction in real incomes of up to $430 a year between 2000 and 2001.
Analysis of Australian Taxation Office figures carried out by the Opposition, which adjusts earnings against increases in the cost of living, has found the incomes of Australia’s middle class shrank by between $150 and $430 a year.
The figures also show the gap between the rich and poor has widened, with the incomes of the wealthiest 5 per cent of taxpayers increasing by $4159 a year in real terms over the same period and their average taxable incomes increasing from $146,661 to $150,820.
I wouldn’t put a lot of weight on this – it’s only a couple of years data and the numbers were affected by the introduction of the GST in that year. That said, there’s no doubt that the basic claim of the release is true. Almost everyone (even, as I recall, the Centre for Independent Studies) agrees that the inequality of market incomes has been increasing over the past twenty years or so, though different studies date the increase at different times and attribute different causes.
Although real incomes have generally risen for all income groups over the past decade or so, the bulk of the gain has been concentrated among the top 20 per cent of income-earners. The rate of growth of real incomes for everyone else has been very slow. So it takes only a modestly bad year, or a price shock like the GST to see real incomes going backwards.
Under Hawke and Keating, the increasing inequality of market incomes was offset to some extent by progressive changes in tax and welfare policy, but the reverse has been true under Howard. One of the experts cited in the report suggests that the figures are distorted by tax concessions associated with negative gearing and encouraged by the cut in capital gains tax under Howard. That’s probably true, but, contrary to what he says, implies that the real picture is even more unequal than that given in the statistics.
John Quiggin 
I would also be interested in measures that don’t just track the fate of “classes” (however defined), but also track the movements of individuals, families and small groups. Otherwise we get statistical artefacts of the same sort as survivor bias and “half of our children are of below average intelligence”. Merely tracking the battlers shows how much that group is being hollowed out, but is not so good at showing other symptoms of trouble at smaller scales.
On the idea of symptoms, I don’t see inequality or increasing inequality as much of a problem in themselves, but I do see them as symptoms of underlying problems and aggravating factors for other problems that might hit people. I suppose that is part and parcel of my previously expressed view, that social democracy tends to grow the problems it addresses but on the other hand merely cutting off the drip feed it has already entrenched, in a Peter Saunders sort of way, is also dangerous if it isn’t done while also eliminating the underlying problems.
PM Lawrence is right – you need good longitudinal studies to interpret these sort of things properly. Wait a few years for HILDA to mature. Even then, though, measured current income is a really poor guide to people’s economic status.
But using tax data for income distribution studies is anyway really fraught with problems, especially where there are tax changes which have as one of their specific aims changing reporting behaviour – as the 2000 changes did.
The classic example of this problem is the Feldstein et al studies beloved of supply-siders. This found that lowering the top marginal tax rate caused a huge boost in economic activity. Trouble is, they’re mainly based on the US Tax Reform Act of 1986 that had a specific goal of lowering rates while broadening the base – ie closing off loopholes and evasion. Surprise, surprise – the rich reported heaps more taxable income the next year. But was this because they were incentivated by the lower marginal rates or because their loopholes were closed off and they had to report their income to the taxman? BTW, we had a very similar phenomenon for very similar reasons in the 1980s in Australia.
The point is, you can read these figures either as they’ve been reported (the middle class getting screwed) or as indicating success by the ATO in limiting the black economy amongst the rich and failing to do so amongst the middle class.
Its also important to remember that income inequality, while real and (IMO) a problem for democracy, is not the same problem as poverty. Just because the rich got richer faster than the poor did doesn’t mean the poor haven’t gained. And, reprising PM Lawrence’s comment, we don’t anyway know who stays ‘poor’ and for whom its just a transient state.