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.
- 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.
Regressive tax is when everyone pays the same levels of tax, and there are no bands for different levels of tax. The burden of regressive taxes are on people of a lower income.
Progressive tax is where the average rate of tax rises as income rises. I.e. the proportion of your income taken in tax rises as you become richer. This
Trickle down effect-
A theory that states when income rises, so will the consumption of the richer people; meaning that there is a high demand for goods and services, so employment increases i.e. industrial revolution; however we are increasingly seeing the rich becoming richer, as their investments are becoming more financially attractive to them, for example investment in property or shares, and not consumer goods. In conclusion, although we may see an increase in jobs from high levels of consumption from richer people; leading to increased disposable income for the people providing their labour for these jobs, the rich are still benefiting at much greater margins in comparison to people of a lower income. The effectiveness of this theory is questionable, as wealth is increasingly being stored among the rich.
Although the trickle down effect isn’t explicitly a Government policy; it can be influence through the rates of tax on people of a higher income.