Horizontal equity – implies that we give the same treatment to people in an identical situation. It makes sure we don’t have discrimination on the grounds such as race / gender / different types of work.
Example – if two people earn £15,000 they should both pay the same amount of income tax.
Vertical equity – Implies that people with higher incomes should pay more tax. This means that it wants to tax in a proportional or progressive way – People with more ability to pay should pay more tax. Therefore its important in the redistribution of income.
It condenses the entire income distribution for a country into a single number between 0 and 1. When the numbers higher it means there is greater income inequality .
If it’s above 0.4 inequality is frequently assocaiGed with political instability and growing social tensions.
The latest value for the Gini Coefficient in the UK is a figure of 0.35.
If we look at the distribution of wealth on the global scale then we can see that China and India have 30% of the population of the world however they only have 8%of the wealth in the economy. Now if we were to look at the distribution of income and wealth in the UK it will show that the issue is much more severe than some people think. The UK has a very high level of income inequality compared to other developed countries.
Although the amount of wealth is increasing in the global economy the gap between the rich an the poor is also increase. This relates to the concept of the trickle down effect. Globalisation and industrialisation has made the poor better off however it has made the rich much better off.
- Higher minimum wage- An example of this would be national minimum wage raising to £7 after 2015 election. A higher NMW would boost work incentives as it increases take home pay. However it could cost some jobs so unemployment might increase and it could lead to higher prices.
- Free provision of services- An example of this would be free NHS treatment and free state education. Free provision would allow access to merit goods not based on ability to pay . However universal access is not as effective as targeted provision.
- Higher rates of income tax- An example of this is that 45% top rate of income tax might be raised to 50% again. A progressive tax on the rich will lowers inequality, while also raising revenue. However if income tax is increased there is a risk of brain drain and increased tax avoidance.
- Investment in training- An example of this is subsidies for work place training/internships. Investment will help raise productivity, increase jobs and increase real wages. It’s also effective in the long run but it’s risks the free raider problem.
- Subsidies for childcare- An example of this is that in 2014 there was a maximum government contribution of £2000 a year for each child. It will improve incentives for mums to look for work and take work if they are getting childcare. Therefore this intervention effective but the quality of the child care needs improving.
It appears that things like investment in training would be more effective than say subsidies for childcare as they have a wider scope.
The poverty trap affects people living in households on low incomes. It creates a disincentive to look or work longer hours because of the effects of the income tax and welfare benefits system.
A worker may get given the opportunity to earn a extra £60 a week by working 10 more hours. This boost to their gross income is reduced by an increase in income tax and national insurance contributions.
They may lose some income related welfare benefits and the combined efffecs of this might be to take away over 70% of a rise in income,leaving little in the way of extra net or disposable income.
When you also add in extra costs of more expensive transport charges and the cost of arranging child care, then the disincentive to work may be quite strong.
The effects of poverty
The impact of poverty can be hugely significant. This can include a;
- Loss of status and income (if the person was previously in employment).
- A decline in self-esteem.
- Strain of government services
- Drug abuse
- A decline in personal health.
- A feeling of social exclusion