5.8 INEQUALITY
At As inequality is not expected to be learned in-depth.
Income inequality is the unequal distribution of household and individual income across various participants of the economy.
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It is view as fairness, and many believe that it is unfair to allow the rich to have a disproportionally large proportion of a country’s income. Other would argue that inequality has a purpose as it acts as an incentive to improve individual’s level of training and specialisation in producing goods and services that allows the individual to command the higher salary. They argue that inequality encourages individuals to become the best that they can be through the reward of higher salaries and wealth as they move up the inequality ladder. However, others argue that a lower level of inequality would have the same effect and the excessive inequality that we are experiencing now is too great. Therefor the discussion of inequality becomes quite normative.
A market rations and allocates resources through the price mechanism and as the majority of good are private good, they are excludable (other people are denied from consuming that good). If an individual cannot afford to pay for a good then they will not be able to consume it. This means that people with larger incomes will be able to consume more than people with smaller incomes (instead of income we could look at wealth. Those who have a larger amount of wealth can use this wealth for consumption. Wealth is a stock and income is a flow). Those with no income will not be able to consume anything. This is why the government steps in to reduce the level of inequality. Most governments have a progressive tax system whereby the income tax rate changes depending on the income level. Income tax is known as a direct tax. Individuals with higher incomes pay a larger percentage of their income than those with lower incomes. In the UK the first £10,600 you earn are tax-free (you keep all of this £10,600). After this you will pay 20% on the income between £10,600 and £42,385. Income levels above £42,385 to £150,000 pay a 40% tax and incomes over £150,000 pay 45% tax. The type of government in power can change these rates or where the bands are. Recently the conservative have changed the top rate of tax from 50% to 45%. The money that is raised from this taxation is then spend by governments on a variety of activities or used to payoff the national debt.
After you have paid your direct taxes you are then left with your disposable income, which is the amount of money, which you can spend on what you please or save (to increase your wealth). When you consume goods, there is usually an indirect tax, such as a sales tax, which is added on top of a good or service. In the UK we have VAT (20%) and duties on certain good like alcohol and tobacco. An indirect tax is regressive, as the tax rate does not change depending on the individual’s level of income. Suppose that we have two individuals, one has an income level of £10,000 and the other has an income of £30,000. Suppose that they both buy the same necessities, i.e. groceries and petrol, over the course of a year, they will pay the same amount of sales taxes because of this consumption. We will say that the sales taxes are £1,500. As a percentage of the first individual’s income £1,500 works out as 15% but as a proportion of the second persons income it works out as 5%. Although this tax rate was the same for both people it was harder on the first because it took a bigger percentage of his income.
Another way which a governments tax can be regressive is if we choose to tax a good or service that is predominantly used by lower income individuals compared with higher income individuals. Poorer individuals tend to consume cigarettes and alcohol at a higher level. Increasing the duties and taxes paid on these goods affects the poor more than the rich, which is why this type of tax can be viewed as regressive. This is why some groups call for more education around smoking and alcohol consumption rather than just adding on a tax.
Inequality can be reduced through transfer payments. The UK has a vast array of benefits where individuals who are unemployed or on a low level of income can claim benefits to increase their income. This increase in income will be used to fund a higher level of consumption, which increases their level of utility and happiness. When you are unemployed you can claim job seekers allowance. Individuals can also claim tax credits (even though the government are now choosing to reduce the level of these). After having children many choose to reduce the amount of hours that they work to look after and bring up children which reduces the level of income that they achieve, meaning that parents are usually worse off at the same time as having another person to provide for. This is why governments give out child benefits to parents. Also, there is some funding available for childcare, which allows the parents to go back to work.
Another way that governments make sure workers are paid enough is to introduce a nation minimum wage. This allows workers to gain a level of income that is high enough to sustain them.
Income is a flow and wealth is a stock. One policy aiming to reduce the wealth of individuals who have an excessive amount is stamp duty. Stamp duty is paid when a house over a certain value is sold. The revenue from this tax goes to the government and can be used for any activity that they please. Another tax on wealth is capital gains tax, which is a tax that is placed on an increase in the value of an asset. If I choose to buy some stocks and share and they appreciated in value, then I become wealthier. The government knows this and they will tax me on the difference between what I bought the stock at and what I sold them at. The amount of capital gains depends upon the level of income of the individual. Another policy to combat excessive wealth is inheritance tax. When an individual dies they often write a will. A will tells everybody where/ who they want their wealth to go to. The government taxes this passing down of wealth. The tax rate is progressive whereby bigger estates are taxed at a higher amount.
When deciding on a policy to prevent/ reduce inequality, the authority need to look into the cause of inequality. The causes of inequality are not needed at such an in depth level for As than they are with A2, but if you would like to explore this subject further then you can find more content in the A2 section.
A market rations and allocates resources through the price mechanism and as the majority of good are private good, they are excludable (other people are denied from consuming that good). If an individual cannot afford to pay for a good then they will not be able to consume it. This means that people with larger incomes will be able to consume more than people with smaller incomes (instead of income we could look at wealth. Those who have a larger amount of wealth can use this wealth for consumption. Wealth is a stock and income is a flow). Those with no income will not be able to consume anything. This is why the government steps in to reduce the level of inequality. Most governments have a progressive tax system whereby the income tax rate changes depending on the income level. Income tax is known as a direct tax. Individuals with higher incomes pay a larger percentage of their income than those with lower incomes. In the UK the first £10,600 you earn are tax-free (you keep all of this £10,600). After this you will pay 20% on the income between £10,600 and £42,385. Income levels above £42,385 to £150,000 pay a 40% tax and incomes over £150,000 pay 45% tax. The type of government in power can change these rates or where the bands are. Recently the conservative have changed the top rate of tax from 50% to 45%. The money that is raised from this taxation is then spend by governments on a variety of activities or used to payoff the national debt.
After you have paid your direct taxes you are then left with your disposable income, which is the amount of money, which you can spend on what you please or save (to increase your wealth). When you consume goods, there is usually an indirect tax, such as a sales tax, which is added on top of a good or service. In the UK we have VAT (20%) and duties on certain good like alcohol and tobacco. An indirect tax is regressive, as the tax rate does not change depending on the individual’s level of income. Suppose that we have two individuals, one has an income level of £10,000 and the other has an income of £30,000. Suppose that they both buy the same necessities, i.e. groceries and petrol, over the course of a year, they will pay the same amount of sales taxes because of this consumption. We will say that the sales taxes are £1,500. As a percentage of the first individual’s income £1,500 works out as 15% but as a proportion of the second persons income it works out as 5%. Although this tax rate was the same for both people it was harder on the first because it took a bigger percentage of his income.
Another way which a governments tax can be regressive is if we choose to tax a good or service that is predominantly used by lower income individuals compared with higher income individuals. Poorer individuals tend to consume cigarettes and alcohol at a higher level. Increasing the duties and taxes paid on these goods affects the poor more than the rich, which is why this type of tax can be viewed as regressive. This is why some groups call for more education around smoking and alcohol consumption rather than just adding on a tax.
Inequality can be reduced through transfer payments. The UK has a vast array of benefits where individuals who are unemployed or on a low level of income can claim benefits to increase their income. This increase in income will be used to fund a higher level of consumption, which increases their level of utility and happiness. When you are unemployed you can claim job seekers allowance. Individuals can also claim tax credits (even though the government are now choosing to reduce the level of these). After having children many choose to reduce the amount of hours that they work to look after and bring up children which reduces the level of income that they achieve, meaning that parents are usually worse off at the same time as having another person to provide for. This is why governments give out child benefits to parents. Also, there is some funding available for childcare, which allows the parents to go back to work.
Another way that governments make sure workers are paid enough is to introduce a nation minimum wage. This allows workers to gain a level of income that is high enough to sustain them.
Income is a flow and wealth is a stock. One policy aiming to reduce the wealth of individuals who have an excessive amount is stamp duty. Stamp duty is paid when a house over a certain value is sold. The revenue from this tax goes to the government and can be used for any activity that they please. Another tax on wealth is capital gains tax, which is a tax that is placed on an increase in the value of an asset. If I choose to buy some stocks and share and they appreciated in value, then I become wealthier. The government knows this and they will tax me on the difference between what I bought the stock at and what I sold them at. The amount of capital gains depends upon the level of income of the individual. Another policy to combat excessive wealth is inheritance tax. When an individual dies they often write a will. A will tells everybody where/ who they want their wealth to go to. The government taxes this passing down of wealth. The tax rate is progressive whereby bigger estates are taxed at a higher amount.
When deciding on a policy to prevent/ reduce inequality, the authority need to look into the cause of inequality. The causes of inequality are not needed at such an in depth level for As than they are with A2, but if you would like to explore this subject further then you can find more content in the A2 section.