Income and Wealth Inequality

Question 1

equality

Answer 1

everyone is treated in the same way

Question 2

extreme poverty

Answer 2

household lives on less than $1.90 a day and is unable to meet basic needs of life like food, education or housing

Question 3

relative poverty

Answer 3

household income is 50% or less than the average income, meaning they have enough to meet basic need but cannot enjoy the same SOL as those with incomes above 50% of the average

Question 4

equity

Answer 4

society distributes resources, such as income, benefits and wealth, fairly among people to give them equal opportunities

This might be achieved by taxing wealthier people more than poorer people and redistributing income and wealth

Question 5

policies to promote equity

Answer 5

More progressive taxation (higher top rate, lower bottom rate/higher tax free allowance); lower regressive tax (VAT)

Benefits - means-tested; universal; UBI

Higher minimum wage

Legislation - discrimination; hiring/firing; leave

Government spending on education

Govt spending on healthcare

key word: MORE progressive tax - tax is lready progressive in most countries

Question 6

evaluation of increasing top rate of tax

Answer 6

Distorts incentives - according to Laffer, the govt may actually collect LESS revenue if taxes rise too much due to (1) tax avoidance/evasion and (2) brain drain reducing employment

increases inequality esp if govt needs to divert resources from public spending to policing tax evasion, and receives less tax revenue from relocated businesses

Question 7

evaluation of reducing regressive taxes

Answer 7

fiscal deficit increases, which could lead to austerity policy that will impact poorer people dependent on public services

or could mean increased borrowing, which will increase burden on taxpayers in LT and have a regressive effect anyways

Question 8

define means-tested benefits

Answer 8

benefits paid only to those whose incomes fall below a certain level

Question 9

define poverty trap

Answer 9

individual or family earns more income from benefits than from a low-paying job, reducing the incentive to work

Question 10

define UBI

Answer 10

a regular, unconditional cash paument made by the government regardless of earnings or employment status

Question 11

define universal benefits

Answer 11

benefits available to everyone in certain categories, often age-related, regardless of their income or wealth

Question 12

define negative income tax

Answer 12

money paid out by the govt to people earning below an agreed annual fixed benefit limit

every person receives a fixed annual benefit, and if the tax paid on earning is less than this benefit, the person receives the difference from the govt

Question 13

evaluation of offering benefits

Answer 13

1. reduces incentive to work and creates poverty trap - greater strain on govt finances
2. impact on govt finances - opportunity cost (could be better spend on ed/health to reduce inequality; borrowing, austerity)

Question 14

define the minimum wage

Answer 14

legally set minimum amount that a worker must be paid. Intends to increase SOL and reduce relative poverty, as well as boost the incentive to work

Question 15

pros of NMW

Answer 15

1. reduce both absolute poverty, and relative poverty and inequality - higher SOL
2. increases the fiscal dividend by increasing tax revenue and reducing spending on welfare benefits
3. encourages training which increases productivity
4. fights monopsony power

Question 16

cons of NMW

Answer 16

1. creates unemployment
2. causes cost-push inflation

Question 17

final NMW eval

Answer 17

1. regional MW better
2. better alternatives with more sustainable impact that target the root - improving ed/training
3. extent of unemployment depends on WES and WED, as well as how high MW is
4. effect depends on info govt has
5. if productivity rises by more than wage cost, UE may not take place. Employment may actually rise

Question 18

eval for legislation

Answer 18

1. cost to businesses may force shutdown/relocation to where policy isn’t as strict, reducing employment opportunities
2. depends on strength of enforcement

final EVAL: risk of govt failure may be high due to unintended consequences - cost of unemployment, lost tax revenue from firms

Question 19

key word: ROOT CAUSE

how does spending on ed/training and healthcare promote inequality?

Answer 19

target the root of the problem by increasing productivity and hence MRP

will increase demand for more producitve workers since demand for labour derived from MRP

will increase eq. wage rate and current wages earned, as well as LT earning potential

this reduces difference between rich and poor in the LT. Not dependent on state policy like benefits and taxation that may change with government changes

Question 20

eval for spending on training and ed

Answer 20

1. costly to govt - opp cost? better use of funds?
2. no guarantee workers will attend schemes if not motivated to increase incomes (could mandate but effect on freedom?)
3. long time to have effect

Question 21

how does spending on healthcare promote equality

Answer 21

if healthcare available more easily and cheaply, workers can receive treatment if they fall ill

this means they can recove more quickly and maintain a high level of productivity

they miss fewer days of work and can perform at an optimum level

this should increase their MRP and… (same explanation as for education)

Question 22

final eval for policy to redistribute income/wealth

Answer 22

1. incentives
2. govt finances - if they can afford it, go ahead
3. equitable, but are they efficient considering distorting of incentives and labour market outcomes?
4. is the inequality so bad that it requires intervention? some income inequality is good, i.e. incentives to increase productivity