8.2 Equity and redistribution of income and wealth Flashcards
What is equity?
Equity is the fair distribution of income
Horizontal equity —> equal treatment of equals. Those with the same incomes are taxed the same
Vertical equity —-> Higher income earners are taxed more (progressive/proportionate taxes)
What is equality>
It is the equal distribution of income
What is the difference between equity and efficiency?
Efficiency refers to how resources can be best used in society. A market is efficient when resources are distributed optimally.
Equity refers to fairness, or what is considered to be an acceptable distribution of income and wealth in society. This could be subjective.
What is absolute poverty?
Incomes below a threshold to access the most basics, life sustaining goods and services
What is relative poverty?
when incomes earnt in a household is below a given average/median
What is the poverty trap?
This is a mechanism which means people are forced to stay poor and they cannot escape from poverty.
It affects those on low incomes and means they do not have an incentive to work.
This is because the rate of income tax is too high and benefits might be too generous. If someone on a low income chooses to work longer, their income will be limited by taxes, National Insurance Contributions and the loss of benefits they are no longer eligible for. This means some people might end up staying on low incomes.
What are some of the policies towards equity and equality?
Negative income tax
This is a type of progressive income tax which means people on incomes below a certain level receive money instead of paying taxes. This type of tax has only been in theory so far.
This aims to redistribute income from the richest to the poorest, thereby reducing income inequality.
Means tested benefits and transfer payments
Transfer payments are welfare payments from the government. They aim to provide a minimum standard of living for those on low incomes. No goods or services are exchanged for transfer payments.
Examples of transfer payments in the UK include:
o Job Seeker’s Allowance
o Income Support
o Child benefit
o The state pension
These are in place to ensure people have a basic standard of living and to help reduce the level of inequality in society. Transfer payments are a means for the government to redistribute income from the rich to the poor.
Means tested benefits are given based on the criteria of income and wealth. Those
on low incomes might be eligible for benefits such as Income Support, for example.
What are the causes of poverty?
Unemployment - through cyclical or structural unemployment. When there is a lack of AD in an economy or a movement away from one industry to another. They may not have the transferrable skills to take them elsewhere
Poor education and skills - those that lack quality to have a MRP high enough to access jobs out there in an economy
Poor health and healthcare can limit productivity and earning potential and can limit the amount people can work and they kind of work
Wage differentials - the bigger the wage differential between high and lower paid professions the greater the relative poverty will be
Born into poverty / raised by a single parent
Tax cuts for the well off can increase relative poverty. The higher income tax bracket has been coming down. This increases the divide between the rich and the poor
Subsistence agriculture dominating societies in developing countries will only ever lead to significant poverty. Don’t realise the value of education and working in diff industries
