Distribution Of Wealth And Income Flashcards
What is income ?
A flow concept measured over a given period of time
- wage salaries from jobs
- Rental income from properties
What is wealth ?
Stock concept - assets with market value that can generate income
- Shares / stocks in businesses
- Ownership of property
What are the reasons for differentials in income and wealth ?
Age - wealth accumulated over time
- Higher income, higher wealth with higher MRP over time
Education (distribution of income)
Ownership of financial assets (pensions, shares, government bonds) - stronger the employer the more likely the employer will give the workers a better pension
Ownership of property (housing) - housing prices could go up
Wage differentials (role of state benefits) (distribution of income)
Which 2 reasons for differentials of income and wealth are inherited
Ownership of financial assets
Ownership of property
This means that richer families are able to stay wealthy whilst the poorer families may remain poor which would maintain the distribution of wealth
How is income inequality measured ?
The gini coefficient
This ranges from 0-100
The lower the number the more equal household income is distributed
What policies could the government implement to decrease the distribution of income and wealth ?
Taxation - progressive or regressive tax
Benefits
Minimum / maximum wages
Legalisation - anti discrimination
- hiring / firing
- Minimum wage
- leave
Government spending on education / training
Government spending on healthcare
What are the positives and negatives of taxation to reduce inequalities in wealth and income
Progressive tax - tax the richer more however if your rich, the incentives to make more money disappears as you know most of your income will be taken away (the Laffer curve) meaning the government may make even less money
Regressive tax - taxing everyone the same amount meaning the government may make less revenue
What are the positives and negatives of raising benefits to reduce inequalities in wealth and income ?
Raising benefits would help as your giving the poor more money and reduce inequalities
Means tested benefits are only given to those who desperately need it and may be taken away when living crisis goes down. However this could result in the poverty trap as you know when your reach a certain income those benefits are removed so you may want to remain below that income thus increasing poverty and put greater strain on public finances
Universal benefit is given to all regardless is they’re in desperate need or not e.g. child support. However the government has to spend a lot on universal benefits which could come at an opportunity cost
How could minimum / maximum wages be used to reduce inequalities in wealth and income ?
Minimum wage gives access the a greater standard of living to those workers who are paid less
Maximum wages are a price ceiling. However if there are maximum wages what are the incentives to be productive or entrepreneurial if your wage can’t increase beyond a certain level
Minimum wage causes unemployment which would increase the inequality
How could legislations be used by governments to reduce inequalities in wealth and income ?
Anti discrimination laws can be used to reduce wage differentials
Hiring / firing laws to make it harder for firms to fire workers and make them unemployed
Minimum wage as stated before
Allowing more maternity leave to make outcomes fairer in labour markets
However these legislation could be very costly to businesses and could cause government failure as many businesses would shut down
Hard to enforce these rules
How could government spending on education / training and healthcare help reduce inequalities in wealth and income ?
Help to improve productivity by increasing skills and this higher MRP and therefore higher wages
By increasing healthcare you can increase productivity as people will be sick for less time which could mean they take less number of days out of work thus keeping their productivity high and their wages high
However these policies are extremely expensive
These policies would take a long time to take effect as they are long term policies
What does the Laffer curve represent ?
Increasing taxes will increase tax revenue up to a point. As soon as taxes are raised above a point called ‘an efficient tax rate’ the amount of tax revenue collected by the government will start to decrease
What 3 reasons does the Laffer curve state why tax revenue is decreased after the ‘efficient tax rate?’
1) Disincentives that higher tax rates bring. Taxing the rich a lot will disincentivise working hard, and being entrepreneurial therefore the rich may subsidise working hard for leisure as they realise working hard is pointless regarding how much they’re being taxed
2) Emigration, skilled workers may leave the country to work in a country where they’re taxed less and can make more money. A lot of these people are the biggest tax payers to the government
3) The higher the tax the more your going to promote tax evasion / tax avoidance which will reduce the overall tax revenue. Tax evasion is where you don’t declare all of your income (illegal) whilst tax avoidance is finding loop holes in the tax system to pay less (legal)
What is meant by government failure ?
Government failure occurs when an intervention leads to a deeper market failure or even worse a new failure may arise
