Poverty and Inequality

Income 

flow of money

Wealth

a stock of assets which includes multiple assets, including house equity shares bonds and investment trusts

Equity

the notion of fairness, an equitable solution will treat individuals fairly

Horizontal equity

people in identical circumstances are treated equally for example people in the same tax bracket

Vertical equity

 people in different circumstances are treated unequal but fairly for example the progressive tax bracket

Equality

the situation where goods and services are distributed equally

Gini coefficient

used to measure income inequality on a range from 0 to one. The higher the number the greater the degree of income in equal.

Highest gini coefficient

0.67

Calculating gini coefficient from Lorenz curve

A/A+B

What does the Lorenz curve show?

 showing the distribution of income within an economy. It shows cumulative share of income from different sections of the population.

What does rightward shift of the Lorenz curve do? How could this occur?

increases inequality

higher rates of indirect tax

less progressive income tax

less benefits and investment in infrastrusture

the gig economy

Absolute poverty

living standards do not change over time, a person only has basic necessities

relative poverty

household income is below 60% of median income

Causes of inequality and poverty 

wages and earning growth - higher skill level and qualification in demand therefore gain access to higher wages 

regressive taxes 

inheritance 

poverty trap - creates disincentive either to look for work because of the effects of income tax and welfare benefits system 

Free market view of inequality

trickle down effect

rewards hard work

rewards risk and investment and creates incentives

Social market view of inequality

unfair

lead to poverty due to consumption of demerit goods and negative externalities

Redistributive policies and examples

 the transfer of income and wealth from some individuals to others by social mechanisms such as taxation and welfare e.g wealth tax, income tax and benefit benefits

Benefits and downsides to redistribution

+ incentivise people to work more and therefore a greater income

+ benefits are targeted

• Huge fiscal cost

• Everyone gets some kind of benefit, even the rich

• Greater incentives may mean there is less incentive to work

Pre distribution and examples

Pre-distribution is when the state tries to prevent inequalities from occurring in the first place. It is a free market view.

Benefits and downsides to redistribution

+ reduces occupational immobility e.g training and apprenticeships

+ Incentivise people to find higher paid jobs

• Opportunity cost to fund other schemes

Indirect approach to inequality example, benefits and downsides

 e.g childcare subsidy

+ reduce cost for parents so they can work instead of being unemployed

• Subsidy opportunity cost

• Not enough nurseries and care nurses due to low wages

Changes to the tax and benefit system

1. for example increasing higher rates of income tax would make the tax system more progressive and reduce disposable income for people at the top

• Increased tax avoidance

Other ways to reduce poverty and inequality 

1. Means tested benefits allows welfare benefits to go to those people who need them the most

2. Linking state pension average earnings rather than prices (triple lock)

3. Special employment measures whether the government employs schemes to raise employment levels

4. Supply side policy of increasing spending on education and training

• Risk of free rider problem

5. Raising national minimum wage and making it covered the gig economy

• May cost some jobs leading to higher prices

 

 

Trickle down economics what is it?

 free market view where they believe we should lower taxes offer no minimum wage and no wealth taxes.

It suggests tax break and economic benefits provided to large businesses and wealthy individuals will eventually benefit everyone in the economy through increased investment and job creation

Explain trickle down effect and disadvantages about it

• If the Rich gain more wealth investment creates jobs and higher spending increases demand, low skilled workers gain higher pay there's increased tax revenue and the multiply effect of increased spending. INCENTIVES

• How did they do not consider market failure, tax cuts to poor affect them more than the Rich

What is UBI? universal basic income

 universal basic income

• No strings attached amount of money from the state to cover basic cost of living

• Paid to everyone regardless of income or wealth

Advantages and disadvantages of UBI

+ redistributive  - beneficial for the poor

+ good spending - education leads to better paid jobs + increase GDP?

 - disincentivises people to work

 - no guarantee what the money is spent on e.g drugs

 - greater fiscal cost

 - inflationary

Gini coefficient of wealth and income inequality

0.59

0.34

Potential for taxing wealth in uk 

1. Property

• Residential homes, commercial real estate and lad holdings

 

2. Financial assets

• Stocks, shares and bonds

• Cash savings in bank accounts

• Pension pots

Recent proposal of wealth tax and advantages and disadvantages

Recent proposal suggests 2% annual tax on wealth above £10 million raising £24 billion per year

+ reduces inequality - is targeted to help redistribute wealth and narrow the gap

+ raises revenue - fund public services or reduce national debt

+ minimal impact on most people

 - capital flight risk - wealthy may move assets or relocate to avoid tax

 - economic growth impact - discourage investment reducing long term GDP growth

 

country with successful wealth tax

Switzerland - 0.1-1%