3.6.4 Redistribution of income and wealth

Question 1

Regressive taxes

Answer 1

The poor pay a larger proportion of their income in taxes (council tax, VAT, duties) than higher income eanrers

Question 2

taxation

Answer 2

Process by which governments collect revenue from entities to finance public servies, infrastructure and gov functions

Question 3

progressive taxes

Answer 3

The rich pay a larger proportion of their income in taxes than lower income owners (income taxes, tax brackets)

Question 4

direct taxation

Answer 4

Tax on income/wealth: burden of tax cannot be passed on (inheritance, income, national insurance)

Question 5

indirect taxation

Answer 5

Tax on spending: producers can pass on indirect tax (duties, insurance tax, VAT)

Question 6

income

Answer 6

payment made in return for labour

Question 7

wealth

Answer 7

Stock and monetary value placed on the assets a person owns

Question 8

poverty trap

Answer 8

People would be poorer if they had a job rather than receiving benefits due to other costs like childcare

Question 9

working tax credits

Answer 9

Working Tax Credit is a state benefit in the United Kingdom made to people who work and receive a low income.

Question 10

difference between wealth and income

Answer 10

• Incomes are taxed
• Wealths are not specifically taxed

Question 11

poverty trap issues posed

Answer 11

• Disincentive to finding a job
• Trade off between reducing expenditure and unemployment and considering the low paid
• Working tax credits help with this

Question 12

ways to reduce poverty trap and get people into work + issues

Answer 12

Reducing benefits
- increases inequality

Increasing income tax threshold —> more has to be earned before you pay tax
- reduces gov revenue

Increasing the minimum wage rates
- can cause increased unemployment and increases costs for firms

Making it harder to get sickness and disability benefits
- some people may need those payments

Capping maximum benefits paid
- hurts larger families

Working tax credits
- high cost if employers pay low wages to all workers

Question 13

why is there taxation

Answer 13

• To create revenue to fund government programmes and services
• Redistribution of income and wealth → progressive
• Economic stabilisation: stimulate spending or calming down booms and inflation
• Regulations and incentives: duty taxes on sugar, alcohol etc
• Public goods: non excludable and non rivalrous

Question 14

taxes and inequality

Answer 14

• Redistribution
• Reducing inequality and poverty is a macroeconomic aim of government
• Revenue from tax → welfare, pensions, education, health
• Depends on who is paying the taxes

Question 15

progressive taxes

Answer 15

• Reduces inequality
• More income tax collected = more progressive → direct tax
• Rate applied in brackets
• Can creare an incentive for tax avoidance (corporation tax)
• Can make a government unpopular
• Inflation can raise people into higher tax brackets, discentive to do overtime and exceed bracket → FISCAL DRAG

Question 16

regressive taxes

Answer 16

• can reduce inequality if funds collected are used for programmes targeted towards poor (welfare, education etc for those on low incomes)
• In the long term, spending on things like education of poor can improve life chances
• Short term spending on welfare will only have a limited effect in comparison
• Indirect taxes on alcohol/tobacco → politically more advantageous as government seen as helping health of population
• Raises revenue for government as it is harder to avoid

Question 17

tax as a disincentive

Answer 17

• Discentive for individuals to undertake overtime, as they may end up paying more tax if they move up a tax brackets
• Leads to migration as worker shortages, but also higher skilled workers may leave to a country with a lower tax rate