Wealth inequality / poverty (part 2 of inequality)

how to measure wealth inequality

1. Gini coefficient

2. Lorenz curve

3. Income shares — quintiles + deciles

reasons behind wealth inequality (more unequal)

1. limited growth in wages makes It difficult for low income and middle income to accumulate wealth

2. high income tend to consume a small fraction of income (spend lesser on daily necessities) , therefore having greater possibilities of savings and accumulating wealth

3. income and wealth inequalities feed on each other (wealth leads to income )

impact of income and wealth inequality

1. economic growth

2. living standards

3. socials stability

Economic growth

• lowers ability of lower income households to invest in human capital (less spending on education , lack of skills , reduce labour productivity , hinder the increase in LRAS and potential growth) ADD DIAGRAM

RWE economic growth

High income inequality can reduce economic growth because poorer households have less access to education and training, resulting in lower human capital and labour productivity. South Africa has one of the highest levels of inequality in the world, with a Gini coefficient of around 0.60 in 2023, while real GDP growth averaged only 0.7% per year over the past decade. This suggests that high inequality may restrict the ability of poorer households to develop their skills, reducing the productive capacity of the economy. Therefore, excessive inequality can reduce potential economic growth by lowering productivity and human capital.

Living standards

1. Material : income increase is concentrated in the hands of the rich minority. The increase in growth may not be shared by the majority. Hence , the majority see not much increase in income and their ability to afford goods and services may not increase significantly. Thus, their material SOL may not increase significantly

2. Non material : High income inequality can reduce non-material living standards by contributing to greater crime and social problems. For example, South Africa has a Gini coefficient of around 0.60, and the IMF identifies high crime as a major problem affecting the country. The economic cost of crime has been estimated at around 10% of GDP, including losses to businesses and households. Therefore, high inequality can contribute to greater social problems and insecurity, reducing people's sense of safety, wellbeing and overall quality of life.

Social and political stability

• high inequalities create societies that are polarised and divided , leading to reduced sense of trust in the system

• Higher income groups have stronger political influence , leading to political inequality

RWE social and political stability

High income inequality can reduce social and political stability because large differences in income can create feelings of unfairness and dissatisfaction among poorer groups. South Africa has one of the highest levels of inequality globally, with a Gini coefficient of around 0.60 in 2023, and the IMF notes that this deep-rooted inequality has affected various aspects of the country's economic and social life. High inequality can therefore increase social tensions and political dissatisfaction, which may lead to protests and political instability. This can discourage investment because firms face greater uncertainty, reducing economic growth and employment.

poverty

refers to an inability to satisfy minimum consumption needs

• poverty indicates a lack of equity

2 types of poverty

1. absolute

2. relative

absolute poverty

inability of people to satisfy their basic needs in an absolute sense that is constant and unchanging (Eg, food , medicine , shelter)

poverty line

determined by authorities (govt or organisations) , as an appropriate amount of income required to satisfy minimum needs

international poverty line

living on less than $1.90 a day , which is defined as extreme poverty

Why most countries have a national poverty line

• $1.90 is too low for higher income/more developed countries

• Government might purposely project a higher poverty line to receive aid for corruption. Eg : South Africa (18.9% vs 55%)

relative poverty

a relative concept that compares the income of individuals or households in a society with median incomes (from the middle person)

if income is equally distributed

there is no relative poverty. The greater the unequal distribution of income , the greater degree of relative poverty

the measurement of relative poverty involves

specifying a particular % of median income below which there is poverty

• take 50% of the middle person

usefulness of poverty measures to govt

1. policies providing income support

2. measures intended to combat poverty

difficulties in measuring poverty

1. measurement problem

2. poverty line related issues

Causes of poverty

1. Inequality opportunities

2. Differences in human capital

3. Different levels of ownership of resources

4. Discrimination

5. Unequal status and power

6. Government tax and benefit policies

7. Globalisation and technological progress

8. Market oriented - supply side policies

human capital

refers to the skills , education and good health that people possess

different levels of ownership

higher income individuals have greater ability to own more physical (assets) and financial capital (stocks)

globalisation

refers to economic integration on a global scale , involving increasing interconnectedness throughout the world in many areas

Technological progress

refers to the discovery of new and improved methods of production

How does globalisation lead to poverty

. However, if low-skilled workers lose employment or experience stagnant wages because production is relocated overseas, their household income may fall below the poverty line. They may also have difficulty finding new employment if they lack the skills required in expanding high-value industries, resulting in structural unemployment and potentially persistent poverty.

Purpose of taxes

1. revenue purpose — for govt to raise revenue

2. economic purpose — to influence AD

3. social purpose — to reduce income inequality/wealth distribution

Direct tax

• refers to taxes levied on income or wealth (unavoidable)

• paid directly by taxpayer to tac authority

• burden cannot be sifted to another person

• effect : disposable income decreases , demand curve shift left

• Eg: personal income , corporate , wealth tax

Personal income tax

• takes paid by households/individuals on all forms of income

taxable income formula

gross income - allowances

• allowances : donations/ course fee relief / handicapped parent relief

Corporate tax

levied on profits earned by the firm

• raising corporate tax does not increase COP since it directly taxes the firms profit

• Sg corporate tax : 17%

Indirect tax

• refers to taxes levied on expenditure or the production/consumption of goods

• paid indirectly to government through firms which sell the good

• effect : shift SS to the left , firms pay tax to govt increases COP

• eg : GST , custom duties , excise tax , cigs and alcohol tax

average tax rate

refers to the proportion of total income that is paid in taxes. Indicates overall tax burden upon taxpayers

ATR= total tax payable/total income

marginal tax rate

refers to the proportion of additional income that is paid in taxes. Indicates additional tax burden imposed on additional income earned

MTR= change in tax paid/change in income

proportional taxation

as income increases , fraction of income paid as taxes remain constant

proportional tax formula

• everyone take away the same proportion of income form taxpayer

• although one may be higher in absolute value , proportion of income paid in taxes is the same

• Tax paid = income x tax rate

progressive taxation

as income increases , fraction of income paid as taxes increases

• takes away a greater proportion of income from those with higher income

• aims to tax the rich proportionately more than the poor so that after tax distribution of income and wealth will be more equal

how are income taxes calculated for progressive taxation

by applying a different tax rate to each successive layer of income. The corresponding tax rates from each tax bracket are known as marginal tax rates

advantages of progressive taxes

1. improves equity (narrows the gap between high and low income workers)

2. greater equality — good for economic growth

3. raise govt tax revenue — provides govt with funds to finance necessary expenditures and redistribute income

problems of progressive tax

1. conflict between economic growth and equity

2. possible disincentive effects of taxes on working and investment

   1. high rate of income tax = discourage people from working , increase unemployment

   2. higher corporate tax = discourage firms from investing , reducing economic growth

regressive taxation

as income increases , fraction of income paid as taxes decreases

• takes away a smaller proportion of income from those with higher income than those with lower income

• proportion of income paid in tax (average tax) decreases as income increases

advantage of regressive tax

good source of govt revenue + discourage the consumption of demerit goods but worse income inequality

transfer payment

payments made by the government to individuals specifically for the purpose of redistributing income away from certain groups towards other groups

• people who receive transfer payment : elderly, the sick , unemployed , poverty

disadvantage of transfer payment

Although it reduce poverty and inequality , it represents a burden on govt budget and creates incentives for people to not work

targeted government spending on goods and services

to ensure lower income households have access to essential goods and services but widens government budget deficit

universal basic income

to provide residents a country with a sum of money that they would receive regardless of any other income they would have

1. reduces income inequality and poverty

2. but expensive , increase govt spending , all households that dont need still receive

policies to reduce discrimination

legalisation —nti-discrimination laws → firms cannot legally discriminate → discrimination becomes more costly/risky → equal access to jobs, education and services → inequality of opportunity ↓

govt intervention in markets

1. minimum wage legalisation — higher minimum wage to be paid to low income , increasing income (eg: it is illegal to set anything below 1.8k , before it was illegal to set anything below 1.3k) but can cause UE since firm COP increase

2. price controls like price ceiling on food (max price on necessities , price cannot be higher than XXX). And price floors (prevents prices from falling below that level)