3.4.2 - Policies to improve equality, equity and poverty

Question 1

Define direct tax.

Answer 1

A tax on household income and business profits.

Question 2

Define indirect tax.

Answer 2

Indirect tax is a tax on expenditure on goods and services such as VAT.

Question 3

How does tax reduce inequality and inequity?

Answer 3

Tax can be used to redistribute income from those on higher incomes to those on lower incomes.

Tax revenue is often used to pay for public services and welfare payments that support lower-income households.

Question 4

Define average rate of tax.

Answer 4

The average rate of tax is the percentage of tax paid on an individual’s total income and is calculated as:

total tax/total income x 100 = average rate of tax

Question 5

Define marginal rate of tax.

Answer 5

The marginal rate of tax is the percentage of tax paid on each extra $ of income someone earns and is calculated as:

change in total tax / change in income x 100 = marginal rate of tax

Question 6

Define progressive tax.

Answer 6

A progressive tax is where the rate of tax rises as an individual’s income rises which means their marginal rate of tax increases with income.

Question 7

Define regressive tax.

Answer 7

A tax where the burden paid falls as a household’s income rises. Regressive taxes take a larger percentage from individuals on low incomes than individuals on higher incomes.

Question 8

Define proportional tax.

Answer 8

Taxes where the burden falls equally on both low and high income households.

Proportional taxes apply the same tax % burden regardless of income level.

Question 9

Draw a diagram representing the three types of tax.

Answer 9

Question 10

List the 5 problems of using tax to reduce inequality.

Answer 10

• Higher rates of tax on high income groups can have a negative impact on incentive to work.
• Regressive indirect tax has a negative effect on low-income households.
• Increasing income tax rates can lead to tax avoidance and evasion.
• Raising indirect taxes leads to higher prices and inflation
• High tax rates can make a country uncompetitive.

Question 11

List the 7 other policies to improve equality, equity and reduce poverty.

Answer 11

• Healthcare
• Transfer spending
• Capital spending
• Anti-discrimination
• Education and training
• Universal basic income
• Employment protection laws and regulations

Question 12

Elaborate on healthcare as a policy to improve equality, equity and reduce poverty.

Answer 12

Governments use healthcare provision to support the poorest in society.

High cost of healthcare may lead to being stuck in poverty.

Question 13

Elaborate on transfer spending as a policy to improve equality, equity and reduce poverty.

Answer 13

Income can be redistributed via unemployment benefits.

Question 14

Elaborate on capital spending as a policy to improve equality, equity and reduce poverty.

Answer 14

Investment on infrastructure can be used to create opportunities for people in poorer households in improve on employment prospects and incomes.

Question 15

Elaborate on education and training as a policy to improve equality, equity and reduce poverty.

Answer 15

Creates greater equity as more individuals have the opportunity to get skilled high paying jobs.

Question 16

Elaborate on universal basic income as a policy to improve equality, equity and reduce poverty.

Answer 16

Universal Basic Income is where a government makes an unconditional, regular payment to everyone in a country.

Question 17

Elaborate on employment protection laws as a policy to improve equality, equity and reduce poverty.

Answer 17

Government can put in place specific laws and regulations that stop employers from exploiting low-income workers. These regulations include:

• Minimum wages
• Protection and support for trade unions.
• The right to paid holiday, sickness benefits and leave for maternity and paternity.
• Regulations to ensure safe working conditions.

Problems of using these policies to reduce inequality

• The opportunity cost of government spending on policies such as infrastructure.
• Government expenditure may mean resources are allocated and used inefficiently.
• Government bureaucracy can result in decisions in healthcare, education and infrastructure being slow and ineffective.
• Increased workplace regulation to protect low-income workers can increase business costs, increase prices and reduce an economy’s international competitiveness.