Wealth and income Flashcards
Example of how government deal with income and wealth distribution
UK Tax system: Pay As You Earn- This system helps with the equitable distribution of income within society, because this is a progressive tax system
Capital gains tax: Levied on the profits from the sale of assets such as stocks, bonds, or real estate.
If you inherit your family’s assets, the government expects you to pay inheritance tax(a tax paid on the value of an individual’s estate after they pass away).
Wealth
A snapshot, a measurement of an individual, firm or country’s assets at a given point in time(an individual’s net worth is measured by the value of their assets). These assets may include shares, houses, bank deposits, land, building society accounts, currency holdings and machinery.
Income
A flow of money going into factors of production(wages/salary represent income going into labour, rent is income going into land).
A flow concept - relates to change over a period of time, measured per day/month per year.
Income may be earned(through employment) or unearned(investment returns, dividends, interest rates, benefits and rent are all unearned forms of income).
Sources of income
Wages and salaries paid to people at work
Benefit payments e.g. state pension
Profits made by owners of businesses
Dividends paid to shareholders
Rental income to landlords
Interest paid from bank accounts, bonds.
International income distribution
World Bank - bank that can lend money to middle/lower income countries
International Monetary Fund:work to achieve sustainable growth and prosperity for all of its 191 member countries.
Organisation for Economic Corporation and Development: the governments of 37 democracies in market based economies collaborating to develop policy standards to promote sustainable economic growth
Link between income and wealth
The link between income and wealth is often thought of as a virtuous circle for the rich, and a vicious circle for the poor.
If you have a high income, you are more likely to have money left over after living costs. You can invest this, gain interest and add to your income.
If you are poor, have no savings and a low income, you are likely to end up borrowing money. Repaying a loan with interest makes it even harder to save or cover living costs.
Factors influencing distribution of wealth and income in the UK
Income and wealth are unequally distributed in all countries.
When an economy grows rapidly, the gap between rich and poor can get wider.
Although all are becoming richer in absolute term , the rich get richer more quickly than the poor.
UK unemployment and economic inactivity rates
Absolute poverty
Defined as living below subsistence. This means the person is unable to meet their basic needs of food, clean water, sanitation, health, shelter and education. The World Bank uses a measurement based on the number of people living on less than $1?25 a day(doesn’t change with economic growth)
Relative poverty
Measured by comparison to the average in the country. In the UK, those with below 60% of the median income are considered to be in relative poverty(changes with economic growth)
Is there absolute poverty in the UK?
No, because we have a social welfare system and a system of benefits(universal credit): everyone has some basic income to live on
Factors affecting distribution of income
Factors of production
Earned vs unearned income
Wage/salary differentials
Globalisation and migration
How factors of production impact distribution of income
Earnings from labour have not risen as fast as earning from land and entrepreneurship, widening the gap I.e. workers’ wages have not risen as much as land owners’ earnings from rent
How earned vs unearned income impact the distribution of income
Unearned income comes from money saved away in investment which earns interests and returns adding to the income of people. Much of this original money may have been passed down from parents.
How wage/salary differentials impact distribution of income
The difference between top earners and bottom earners. As many recent new stories have demonstrated this gap is getting wider. Jeremy Corbyn(Labour leader) has suggested this differential should be capped: Under a future Labour government, he said the chief executive of any company awarded a government contract would not be paid 20 times more than the company average.
Impact of globalisation and migration on distribution of income
The freer movement of goods and labour have arguably widened the gap between the rich and poor: Rich countries exploit poorer countries - multinational corporations like Tesla and Google typically originate in richer countries like America/Western Europe, and do their business in low-income countries, where labour, land and materials are all cheaper, and take these profits to the richer parts of the world, leaving in poverty.
Low paid workers in industries such as manufacturing and call centres are aware that they’re in competition now with cheap labour in other countries, exerting a downward pressure on their wages.
By contrast, executives justify their high salaries through international comparison, suggesting they’ll move abroad if they’re not paid a competitive rate for their skills.
Distribution of wealth in the UK
The Office for National Statistics lists four components to an individual’s total net wealth:
Net property wealth(house)
Physical wealth(car)
Net financial wealth(cash)
Private pension wealth(pension)
Government are concerned with:
Equitable distribution of wealth and income
Efficient distribution of wealth and income
Factors affecting distribution of wealth
Capital gains: This means benefitting from an increase in the value of an asset e.g. a house. The rich will own houses that are likely to gain in value, therefore adding to their wealth. The poor may not own a house at all. The gap widens.
Pension assets:
Private pension assets accounted for 37% of total household wealth(2010-12 figure), equalling the proportion of wealth from property. The poor have not traditionally had private pensions, either through lack of access to workplace schemes or lack of spare cash to invest. Private pension may be a lot higher than state pension. NB: state pensions are not included as you do not have a lump sum(total sum of money), rather they count as a flow concept giving a monthly income.
NB: The automatic enrolment of workers into employers’ pension schemes is a policy introduced to address how lots of people receive retirement without pensions(anyone with a new job should be automatically enrolled into a pension scheme).
In the UK, higher wealth inequalities are due to a concentration of increasingly valuable assets in the hands of older members of society, as continued growth in asset prices has increased the wealth of those holding these, while people across the income distribution have seen their incomes stagnate in recent years. In 2008, it took 10 years’ worth of typical full-time gross earnings to move from the middle to the top of the wealth distribution, whereas by 2018, this had increased to almost 16 years.
Inheritance, gifts and luck:
Wealth distribution is in part accounted for by accidents of birth and luck.
More difficult to inherit in the UK: the majority of people don’t own enough assets to pass to their offspring.
Old money is a label referring to money inherited rather than earned.
New wealth refers to wealth generated by entrepreneurs and others who get lucky, take risks that pay off, or win the lottery.
Taxation:
Both income and wealth can be taxed. Different governments and political philosophies apply different principles to this.
In the UK, the greater part of tax revenue comes from taxation on income than on wealth.
Even where wealth is taxed(e.g. inheritance tax), the wealthiest are often able to avoid losing too much of their wealth because they have the means to employ clever accountants who know the loopholes.
From April 2026, additionally, the extra amount of universal credit for a health condition or disability will be frozen for existing claimants until 2029/30 and cut by almost half for new claimants.
Examples of flow concepts
Flow concepts relate to change over a period of time e.g. income, consumption, government,ent spending
Income distribution in UK
Overall, in 2023(according to the Office of the National Statistics), it’s clear income distribution is very unequal, with a large number of individuals below the median income(£621 per week) and a large number of high income recipients.
Over the last twenty years, income distribution in the UK has remained fairly constant: from twenty year period between 2002/03 and 2022-23: an individual in the bottom quintile had an average income 23.6% of someone in the top quintile, whereas those in the 2nd, 3rd and 4th quintiles had 36.1%, 48.2% and 64.9% respectively- whereas in 2022-23, the corresponding years were 23.9%, 38.1%, 50.4% and 66.7%.
As of 2021, the UK had a higher Gini coefficient than several other countries, showing greater income inequality compared to these countries.
Why would mean income be greater than median income?
The mean income can be skewed by the very large number of people receiving high incomes
Wealth distribution in the UK
Wealth inequality in the UK is greater than income inequality with a Gini coefficient score of 70.8, compared with 35.0 for income.
In the latest period, the wealthiest 10% of households held 43% of all the wealth in Great Britain: in comparison, the bottom 50% held only 9%.
Economic consequences of higher income and wealth inequalities
Inequality can have adverse political and social consequences, with the potential to undermine macroeconomic stability and sustainable growth, however the evidence on the relationship between inequality and economic growth is mixed, because authors from the Equality Trust suggest a rise in growth could be linked to risk-taking, investment and entrepreneurship: the rewards for which result in incomes rising faster at the top end of the distribution, with inequality increasing.
However, if higher inequalities are the result of rent-seeking behaviour, where some people benefit from rising asset prices, there will be no associated growth benefit.
The existence of poverty traps reduce the incentives and abilities of the poor to undertake risky entrepreneurial activities, and accumulate physical and human capital, seen as in the UK, a high proportion of younger adults have been finding it difficult to amass financial and property wealth.
Evidence of inequalities: Living standards for all UK families are set to fall by 2030, with those on the lowest incomes declining twice as fast as middle and high earners.
Income and wealth redistribution positives
There is a case for poverty reduction policies through income and wealth redistribution as a means of stimulating growth. By redirecting spending power to those at the lower end of the distribution, who generally have a higher marginal propensity to consume out of income, growth can be increased, and this can also improve health and educational outcomes and stimulate entrepreneurial activity, improving human capital and potential growth.
It’s right everyone should have a fair share of resources to improve their economy and social standing:promotes a willingness to participate in collective action, promotes social cohesion and reduces social tensions(the gap between those at the top and bottom of the distribution is reduced).
Marginal propensity
A measure of the proportion of an increase in income that a person or household is likely to spend on consumption(goods and services) rather than save.
Income and wealth redistribution negatives
If income and wealth are reallocated towards the poor through higher taxation, the rich are worse off, and there may be negative effects on economic growth if higher taxes reduce incentives to work harder, benefit from promotional pay and earn more(in the UK, the top 1% of income earners already pay 28% of total income tax).
Taxes on businesses: a rise in corporation tax on profits(used to finance investment) and inheritance tax on the transfer of the firm may inhibit investment and innovation.
Higher National Insurance paid by firms on their workers, and a rise in the National Minimum Wage, increase costs and reduce profits and investments too.
Principle of equity: it’s unfair to take disproportionately from the better-off if they’ve reached their position through hard work, risk taking and entrepreneurship, creating growth and jobs for others, and give it to those who may have contributed little, however income and wealth disparities derive from inheritance e.g. where people have the good fortune to own property/financial assets that have increased in value through no efforts of their own.
Current degree of income redistribution in the UK
Comparing the original income figures with those for disposable income, as of 2023(according to the ONS), the effect of taxing the better off and redistributing via benefits to the less well off reduces the ratio between the richest and poorest fifth of individuals from 11.6 to 5.5.
The ratio of final income is a further reduction to 3.4.
Original income
From employment, private pensions, investments
Gross income
Takes into account benefits such as the state pension and JobSeeker’s Allowance
Disposable income
The amount of money an individual or household has available for spending and saving after deducting direct taxes such as income tax and national insurance from their total income.
Post-tax income
Post tax refers to the amount of money an individual or household has available for spending and saving after expenditure taxes(indirect taxes imposed on expenditure on goods and services) are taken out of their total income.
Final income
Adds benefits to the amount of money an individual or household has available for spending and services, such as the value of the NHS and education services.
How unemployment causes income inequality in the UK
Losing sources of income here:
Frictional unemployment(temporary unemployment)
Cyclical unemployment(economy booms/then decline and recession/then recovery/then decline again - unemployment increases during decline)
Seasonal unemployment(summer jobs stimulate recovery)
Structural unemployment - where there’s a long term decline in demand for the goods and services in an industry, costing jobs(caused by geographical immobility of labour - workers are unable to relocate)
Economic inactivity in the UK - how this causes income inequality
25% of the population aren’t actively looking for work: miss out on sources of income(lack of motivation due to unsuccessful job applications, early retirement, COVID(people opting out of labour market, but expecting benefits))
Equity
Distribution of income/wealth being regarded as fair(normative concept)
Equality
Everyone gets the same
Lorenz curve
The closer the Lorenz curve is to the line of equality, the more equal the distribution of income is.
The bigger the gap between the two, the greater the level of income inequality.
A completely equal distribution of income:
The bottom 50% receive 50% of the income
Gini coefficient
A value between 0 and 1:
0= complete equality
1 = complete inequality
0.4= threshold: inequality above this level is frequently associated with political instability and growing Sofia tensions
Comparing countries with Gini coefficients(according to World Bank World Development Indicators dataset)
Higher Gini coefficients(low income equality):
Haiti(60.79)
Colombia(53.5)
Paraguay(51.67)
Low Gini coefficients(low income inequality):
Ukraine(24.09)
Slovenia(25.59)
Norway(25.9)
Kuznets Inequality Curve
The Kuznets Curve suggests inequality often rises during a phase of rapid industrialisation and urbanisation, but there may come a point when increased welfare provision, progressive taxes and more balanced income growth across industries might lead to a fal in overall inequality at higher per capita incomes.
How would you reduce poverty and inequality in an economy?
- Increase economic growth: Economic growth increases the total income in the economy, creating more jobs, so all in society benefit,including those in poverty.
- Decrease unemployment:Those who are unemployed are most likely to be in poverty as they have no income, with large projects.
having the potential to create multiplier effects in the local job markets.
3) Taxes and benefits have a huge impact on inequality and poverty.
Review of income tax
Getting a pay rise doesn’t mean you pay the higher income tax on everything before, just above the threshold level you have crossed.
Fiscal drag
A concept where inflation and earnings growth may push more taxpayers into higher tax brackets.
When wages inflate and tax bands do not change, more low income people are pushed into paying tax, and more people move into higher tax rates, so in real terms, people are worse off.
Earning trap
This affects those in low income work, rather than unemployed.
Means-tested benefits mean welfare payments are reduced as income.
However, as income increases, so do tax and National Insurance payments.
The overlap is known as the Earnings Trap, as people are discouraged from working due to the minimal increase in final wage.
Unemployment Trap
A situation when unemployment benefits discourage the unemployed to go to work. People find the opportunity cost of going to work too high when one can simply enjoy the benefits by doing nothing.
Factors impacting pension poverty
- Pensions used to increase each year in line with average income. Pensioners kept up with the working population.
- 1980s- rise in inflation: if incomes rose faster pensioners became poorer - 1980s living standards
- 2011- the triple lock: Pensions rise either by inflation, average earnings or 2.5%, whichever is highest
Causes - unemployment
Benefits are lower than average pay.
If you don’t work, you slip behind, particularly for those structurally unemployed.
Excessive debt
Cost of living
