Redistribute income and wealth - Policies Flashcards
How are income and wealth related
They are mutually reinforcing concepts
With high income expect high wealth
What type of judgement is government intervention
A normative judgement based on equity
Taxation
Increase progressive tax or decrease regressive tax
Increasing progressive tax: advantages
Raising tax on those earning in highest income bracket = tax revenue
Raise income tax free allowance in lowest income brackets = poor keeping more of their income
Decreasing regressive tax: advantages
Increases value of income for poor
Examples of regressive tax
VAT
demerit goods: alcohol
cigarette tax
fuel tax
Who suffers the burden more from regressive taxes?
The poor
Increasing progressive tax: disadvantages
The rich are disincentivised to earn more, because have knowledge that most of their income will be taxed away (laffee curve)
Distorts incentives = reduction in tax revenue
Decreasing regressive tax: disadvantages
Hits government finances as regressive tax contributes a lot.
Austerity policies may go forward to help control government budgets
Universal benefits
Available to all
Don’t get taken away under any circumstances
Example of universal benefits
Child benefits
Means tested benefits
Benefits to those who desperately need it
Taken away when incomes reach certain threshold
Example of means tested benefit
Unemployment benefit
Disadvantage to mean tested benefit
Poverty trap
Aware benefits taken away when income reaches certain threshold
Incentive to stay on benefits and not find work
= greatest strain on public finances and inefficient outcomes
Disadvantages to universal benefits
The more universal benefited implemented, the more the government needs to spend
=Greater fiscal impact
=Future issues - austerity policy needed?
Advantages of minimum wages
More people can access better living standards
Minimum wages
Set above competitive outcomes to help those on lower wages
An artificial boost to the wage rate
Inplementing maximum wages means…
Capping bonuses
Disadvantage to implementing maximum wage
Less incentive to be entrepreneurial and productive if wage can’t increase beyond a certain level
Disadvantage for minimum wage implemented
Youth unemployment rises
Legislation that can be imposed
Anti-discrimination - helps decrease wage differentials
Hiring/firing - Makes it harder for firms to make workers redundant decreasing unequal distribution of income and wealth
Minimum wage
paternity leave
Disadvantages of legislation
Cost to businesses
enforcement
Government failure
Enforcement
Needs to be strong to make an impact
Legislation: Government failure
Businesses may shut down because of how costly the legislations are
May relocate to other countries where legislation isn’t as strict
Unintended consequences: cost of intervention outweighs the benefits of intervention
Supply-side policies
Government spending on education/training
Government spending on healthcare
Government spending on education/training advantages
Increase skills = increase MRP = increase productivity = rise in incomes and wages
Government spending on healthcare advantages
If sick, treated easily = less sick days = maintain productivity
Advantages to implementing supply-side policies
Tackling root cause of unequal distribution of income and wealth
Long-term situations improve
Disadvantages to supply-side policies
Government finances
time-consuming
Evaluation: incentives
Perverse incentives policies may promote
Evaluation: government finances
Can the government afford them?
Evaluation: equity vs efficiency
Distortion of incentives = inefficient in terms of end outcomes
Min/max wages = Distortion of significant labour market outcomes
Evaluation: normative judgement
Risk of inefficiency greater, as an opinion
Intention to make things better, may be made worse = gov failure
Evaluation: is inequality always bad?
Is level of inequality acceptable for what capitalist economies bring?
Risk of government failure outweighs benefits
