Wealth and Income Equality Flashcards
Differentiate between Wealth and Income
Income is a flow concept which is measured over a given period of time, while wealth is a stock concept, where assets with a market value can generate income
How is income and wealth mutually reinforcing?
More income generated, More wealth is generated through purchase of assets, generating even more income to purchase more assets and so on
What are some reasons for differentials in income and wealth?
- Age
- Education
- Ownership of Financial Assets
- Ownership of Property
- Wage Differentials
- Employers [Pension schemes]
What is used to measure income inequality?
- Lorenz Curve [visual]
- Gini Co-efficient [mathematical]
What does the Lorenz Curve show about Income Inequality?
Further away the lorenz curve from the line of perfect equality, more income inequality is present
More the total % of income is held by a small proportion of population
What does the Gini Co-Efficient tell us about income inequality?
It measures the distance between the Lorenz Curve and Line of Perfect Equality
0: Perfect equality
1: Perfect Inequality [One person has all income]
Define Absolute Poverty
Incomes earned below a certain threshold where individuals cannot access basic, life sustaining goods and services
[$2/day]
Define Relative Poverty
Incomes earned by a household are below the average in society
Differentiate between Equity and Equality
Equity is the fair distrubution of income while Equality is the equal distrubution of income
Differentiate between Horizontal Equity and Vertical Equity
Horizontal Equity : Same income, Same tax
Vertical Equity : Different income, Different Tax
What are the causes of poverty?
- Unemployment [Cyclical, Structural]
- Poor Education
- Poor Healthcare
- Wage Differentials
- Born into Poverty / Single Parent
- Subsistence Agriculture
- Tax cuts for well-off
How is a Minimum Wage justified to reduce income inequality?
- Poverty Alleviation
- Counters Monopsonist Employers
- Incentivises Work
- Fiscal Benefits Derived
- Incentive to Boost Human Capital
- Reduce Wage Differentials
- Morale Boost
What are the arguments against Minimum Wage?
- Classical Unemployment
- Youth lose out [MRP]
- Those who are not on NMW
- Costs to Businesses [Shutdown, Comeptitiveness]
- Regional Differences
What is the Laffer Curve Argument?
Economist Arthur Laffer argued that increases in tax rates will only generate additional tax revenue up until an efficient point, beyond that, it decreases due to disincentives, emigration and tax evasion/avoidance
What are some policies to redistrubute income?
- Taxation
- Mean-tested benefits
- Supply side policies
- Legislations
- Minimum Wages
What are Mean-Tested Benefits?
Transfer payments of income from the government to those who really need it, but the benefits are taken away once living standards rise
What are some Evaluative Points to consider for income redistrubution policies?
- Incentives being perverse [mean-tested benefits]
- Govt Finances
- Normative Considerations
- Is the level of inequality high? Or is it acceptable for a capitalist economy?
What is meant by Normative Considerations?
There are risks of government failure and inefficiency which can distort outcomes
What is Universal Basic Income [UBI]?
A welfare policy that gurantees everyone in the population a monthly income regardless of their current income, employment or other factors
What are the arguments for Universal Basic Income Schemes?
- Supports those out of work [economically inactive, those unable to find a job]
- Overcomes issues with mean tested benefits
- Top up income for those in the gig economy
- Can support entrepreneurship through accrued savings
What are the arguments against Universal Basic Income Schemes?
- Can encourage laziness
- Reduced labour market flexbility [i.e no incentive to increase MRP or occupational/geographical mobility]
- Poorly targeted, and high costs
- Inflationary concerns
What is Wealth Tax?
Tax on an individuals net worth/assets rather than their income
What are the arguments for Wealth Tax?
- Increased government revenue
- Reduces wealth/income inequality
- Promotes reallocation of wealth
- Can target windfalls [Ex. high share prices of imperfect markets]
What are the arguments against Wealth Tax?
- Laffer concerns [Emigration, Disincentives, Tax avoidance]
- Discourages income generating activity
- Admisintrative challenges, such as valuation of the asset or chosen asset
- Discourages investment and saving [multiplier effects]
