Inequality Flashcards
What is relative poverty
When a households income is below 60% of the median countries population.
-> for example one who lives in relative poverty in the Uk may be better off than one in (Chad) as we can access free health care ect
What is absolute poverty
When income is so low that it is impossible to access basic necessities
What percentage of people live in relative poverty in the UK
18% in 2019/2020
Define wealth inequality
Wealth inequality therefore refers to the unequal distribution of assets in a group of people.
Assets are things such as property, investments or art work.
define income inequality
The unequal distribution of income in a group of people
3 negatives of inequality
- Can cause relative poverty -> increased costs to government through universal credit.
- can causes an increase in crime -> as people may need to steal to access basic goods
- (evaluation) If there is regional inequality it can cause a disincentive to work.
2 positives of inequality
- Trickle down effect
2. Higher incentive to work or better their skills -> as those who do get paid better sums of money
What is the trickle down effect?
If high-income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society
This can occur through higher AD or increased business investment.
Evaluation of the trickle down effect
- High-income earners have a high marginal propensity to save. Therefore, the increased disposable income from a tax cut does not filter into other sections of the economy because it is saved not spent. -> less money for benefits
This was shown in Ronal Reagans presidency when income tax is lowered
What effect does an income tax cut have on the economy?
A tax cut increases incentive to work as one can gain more disposable income. As a result it may increase economic activity
2 Causes of income inequality
- Weakening of trade unions
- A reduction in the level of progressiveness of the tax and benefits system or a Regressive tax taking a larger percentage of income from low-income earners than from high-income earners.
Equity
Equity recognizes that each person has different circumstances and allocates the exact resources and opportunities needed to reach an equal outcome.
Equity focuses on equal outcome
Equality
Equality means each individual or group of people is given the same resources or opportunities
Equality focus on equal starts.
What is the cost of inequality in the UK
£39 billion per year
Many of the costs associated with inequality remain incalculable. For example, how does one value the higher level of community cohesion, trust, and social mobility associated with less unequal countries?
4 ways to solve poverty
- progressive taxes
- minimum wages
- Supply side policies (such as education)
- Increased benefits
3 negative points of progressive taxes
- can disincentivize workers and lower economic output - Laffer curve curve
- it may only help the poor if the tax revenue earned is reinvested into the poor areas
- Brain drain - people relocate that are high skilled leave the country
Evaluations point for the minimum wage
- It can cause unemployment as labour intensive industries may especially be affected. ->more unemployment benefits
how can poverty be solved by market forces
chains of reasoning
- with low income taxes and low welfare spending there is more incentive to get employed
- more people get educated
- more eligible for jobs (better quality and quantity of FOPS)
- higher income
- increased demand results in the multiplier effect elsewhere
what is the employment trap
when it becomes more beneficial to stay unemployed as the benefits earned is much higher than working a job
why may the free market be unable to solve poverty
- Assumptions required for free markets to operate well are inconsistent with reality such as the myth of perfect and symmetric information, rational actors, and costless transactions.
- A competitive environment creates an atmosphere of survival of the fittest. This causes many businesses to disregard the safety of the general public to increase the profits
causes of inequality
- rising property prices has reduced disposable incomes for young people
- increase in part time and temporary work which isn’t protected by trade union and is often low paid
why is the national minimum wage limited in reducing inequality
as they jobs usually are occupied by second income earners and students who aren’t poor
what is on the axis of gini coefficient
Y- percentage of income
X- percentage of population.
what represents perfect equality in the gini coefficient
0= perfect equality
1= perfect inequality
Progressive taxation
Tax system where % rate of increases as an individuals income increases
Aims of progressive taxation
Reduce inequality
Recognition of the diminishing marginal utility of income
Increase incentive for people to take low paid jobs - lorry drivers
Other types of progressive tax
Capital gains
Stamp duty
Justifications for progressive taxes
The diminishing marginal utility of money - living costs
Positional externalities
Happiness
Regressive tax
Percentage of tax payed is the same for all consumers hurting lower income individuals more as it takes a larger percentage of their income
Example of regressive tax
VAT
Excise duty
Fiscal drag
where inflation and earnings growth may push more taxpayers into higher tax brackets. Therefore fiscal drag has the effect of raising government tax revenue without explicitly raising tax rates.
Poverty trap
when people have little or no incentive to get a better paid job or work longer hours.
