Distribution of Income · Distribution of Wealth · Government Policies

Horizontal and vertical equity

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.

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Distribution of Income · Distribution of Wealth

Costs and benefits of a more equal/unequal distribution

Equal

Benefits-

  • Consumption will increase so demand will also increase in the economy
  • Will help reduce poverty
  • More equal societies are more capable of dealing with problems like extreme weather so there can be environmental benefits

Costs-

  • Wealthier individuals would lose money so they wont be able to provide funding to things like charities
  • Incentives to set up businesses decreases if their profit will be taxed away

 

 

Unequal

Benefits-

  • It could be economically beneficial to businesses who have taken risks
  • Trickle Down Effect. If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers.
  • If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output

Costs-

  • Negative impacts on the growth of the economy
  • Likely that the only people who will benefit are the highest earners
  • May reduce demand due to lower incomes
  • An increase in inequality would force more people into poverty
  • Arguably inequality can lead to social friction. It can be a factor in precipitating riots or higher crime levels. In this case all members of society lose out.
  • The biggest cause of relative poverty is unemployment. Unemployment is considered a type of market failure because it represents an inefficient allocation of resources in a free market.

 

Distribution of Income

Distribution of income

  • The median income is £21,400
  • The mean income is £30,000.
  • The average income for the top 1% of U.K. Income distribution is £150,000.
  • The richest 10% of taxpayers receive 1/3rd of income.
  • The bottom 49% of households get almost half of their income from state welfare benefits.
  • The UK is one of the worlds most unequal rich countries: the poorest 10th get 1% of total income; th richest 10th 31%.
Income and wealth inequality

Ways the level of inequality of income and wealth can be measured

  • Share of income going to different groups in society, e.g. the poorest 20% of households at the bottom of the income scale through to the richest 20%
  • The proportion of all households who live on an income below an official poverty line
  • For the UK and other EU countries, the current poverty line is an annual income of less than 60% of median income. The median individual is in the middle of the income distribution
  • Gini co-efficient
Income and wealth inequality

Key causes of income and wealth inequality

  • Education- people will not have the skills and training required to be able to have some jobs which are typically higher paid. Therefore, they will lack experience to get other jobs in the future
  • Age discrimination or unfair treatment based on a person’s age can impact on someone’s confidence, job prospects, financial situation and quality of life.
  • Ownership of financial assets- people of a higher income are increasingly investing in stocks and shares, which is leading to the rich becoming richer, however the ‘trickle down effect’ is not occurring as this is a self-benefitting investment
Distribution of Income · Distribution of Wealth

Distribution of income and wealth

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.

Government Policies

Evaluating intervention policies to reduce inequality

 

  • 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.
  • http://www.bbc.co.uk/news/uk-politics-31907601
  • 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.
  • http://www.dailymail.co.uk/femail/article-2228433/Whys-state-obsessed-subsidising-childcare-mothers-young-children-want-stay-home.html

It appears that things like investment in training would be more effective than say subsidies for childcare as they have a wider scope.

Poverty

The poverty trap

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.

Example-

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.