Download Income Redistribution - RSA Business Faculty

The distribution of income looks at how evenly income is distributed
among the population.
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Income Redistribution – a policy to reduce the inequalities in income so that
incomes are distributed more fairly.
The aim of income redistribution is to reduce inequalities of income so as to create
a fairer society. So it can be said that income redistribution might be done to
increase equity. There will still be large income differences between households
but not as large as before the redistribution.
Income redistribution also aims to provide every family with a basic standard of
living so as to prevent poverty
Also helps to reduce the economic costs that may be associated with inequality
• Income and Wealth
• Income is a flow of factor incomes such as wages
and earnings from work; rent from the ownership of
land and interest & dividends from savings and the
ownership of shares
• Wealth is a stock of financial and real assets such as
property, savings in bank and building society
accounts, ownership of land and rights to private
pensions, equities, bonds etc
• Wealth is even more unevenly distributed than
income
Causes of Inequality
• Inequality of Wages and Earnings – Supply & Demand
• Rewards of growth uneven(salaries, bonuses, dividends
tend to go to those higher up income scale)
• Unemployment
• Wages have historically risen faster than benefits (until
recently)
• People looking for semi/unskilled work have less bargaining
power
• Growth in numbers of part time, poorly paid, service
sector jobs
• Changes to tax and benefit system. - Increase in
regressive taxes, fall in progressive nature of UKs direct
taxes
Costs of Inequality
• External Costs to Society – these have to be
paid for - Spirit Level – evidence of more
social problems in uneven societies – obesity,
mental health issues, crime etc
• Costs of inequality are expensive to deal with
– opportunity cost! – money spent on policing
could be spent on other things
• Unemployment – lost output
Impact on Business & Economy
• Impact on Demand and Spending – lower income earners
spend less so growing inequality alters patterns of demand
and spending – is inequality holding back the recovery?
• Some businesses may suffer but those targeting the poor
and rich may thrive
• Social Costs can divert resources from elsewhere
(opportunity cost)
• Low levels of education and training may deter businesses
from investing where this is a problem
• Inequality may lead to lower levels of education and skills
• Low wages at bottom end may attract some businesses
• Political Instability – eg riots
Why redistribute income?
• The aim of income redistribution is to reduce
inequalities of income so as to create a fairer society.
So it can be said that income redistribution might be
done to increase equity. There will still be large income
differences between households but not as large as
before the redistribution.
• Income redistribution also aims to provide every family
with a basic standard of living so as to prevent poverty
• Also helps to reduce the economic costs that may be
associated with inequality
Redistribution of Income – How can it be
done?
• If the government wishes to reduce
inequalities it will increase progressive direct
taxes and reduce regressive indirect taxes. It
will also increase transfer payments paid to
lower income groups. In addition it can
increase its own spending on measures that
will help reduce inequalities. For example it
could spend more on education and training
as this will help people to earn more in the
future.
Transfer Payments
• These are benefits to citizens that are paid out
of tax revenue. They are called transfer
payments as the money is transferred from tax
payers. These include job seekers allowance,
child benefit and tax credits.
Policy
Redistribution
Explanation
Evaluation
Increase Transfer Payments
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Equality of Opportunity
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Other
How to reduce inequality?
• Redistribution
• This involves changing the current distribution
of income through the use of taxation and
transfer payments
• It helps to reduce poverty and makes the
income distribution more equitable but it
doesn’t necessarily address the main causes
of income inequality
How to reduce inequality?
• Increase Minimum Wage
• Raises the income of the lowest income earners and
should therefore reduce income inequality and poverty
• Increases incentive to work
• BUT - Only affects the lowest income earners
• Doesn’t address the causes of poverty and inequality.
Yes boosts low paid incomes but doesn’t give the low
paid the opportunity to gain better jobs.
• May impact on UK competitiveness and may even lead
to higher unemployment
How to reduce inequality?
• Policies to increase equality of opportunity and
social mobility
• These recognise that some people have lower
incomes as they have not had the same
opportunities as other members of society
(family background, where they live, education
chances, aspirations etc)
• Investing / improving education etc should help
people to gain the qualifications and skills that
enable them to gain higher paid jobs
• Tuition Fees!
Disadvantages - Disincentive Effects
• But there will be other effects on the economy. In particular
there might be adverse effects on incentives. High direct
taxes may have adverse effects on the supply side of the
economy.
• High Benefits – may reduce incentive to work
• High Progressive Taxes – may also reduce incentives to work
and may reduce incentive to work hard and try to get a
better job if people know 40% of any extra income will be
paid in tax.
• High tax earners leave UK – some high tax earners may move
abroad to escape the tax and then the UK government loses
tax revenue.
• Disincentive to Invest – high tax on business act as a
disincentive to invest
The Impact of Redistribution on
Business and Economic Welfare
• For 
• Equity - The aim of income redistribution is to reduce
inequalities of income so as to create a fairer society.
• Less Poverty - Income redistribution also aims to
provide every family with a basic standard of living so
as to prevent poverty
• Reduces Costs of Inequality – see earlier – May
improve quality of labour force, education and skills
• Increased Aggregate Demand – lower income earners
have a higher MPC
• Changing Patterns of Demand – may benefit some
businesses -mainstream
The Impact of Redistribution on
Business and Economic Welfare
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Against 
DISINCENTIVE EFFECTS
High Benefits – may reduce incentive to work
High Progressive Taxes – may also reduce incentives to work and may
reduce incentive to work hard and try to get a better job if people know
40% of any extra income will be paid in tax.
High tax earners leave UK – some high tax earners may move abroad to
escape the tax and then the UK government loses tax revenue.
Disincentive to Invest – high tax on business act as a disincentive to invest
Makes UK a less attractive place for business
OTHER
Changing patterns of demand – may impact negatively on some business
The Poverty Trap
• Poverty Trap / Unemployment Trap
• A situation where a person reduces his or her net
income by taking a job, or gaining a higher wage,
which disqualifies him/her from claiming social
security benefits or raises his/her tax liability.
• When taking a job people may have high
childcare costs
• May lose access to benefits such as free school
meals
Current Gov Policy
• Tax Credits – the government has changed the
system of tax credits to incentivise work further
• The government has pledged free health school
meals for reception and years 1-2 from
September 2014
• The Government used the Budget to
announce that a new tax-free childcare
voucher scheme would be introduced in
Autumn 2015. Tax-free childcare was
expected to provide parents with tax savings
of up to £1,200 per child each year
Links to Case Study
Fuel Poverty – DECC Definition
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Fuel Poverty is Rising
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Fuel poverty in England is measured by the Low Income High Costs definition,
which considers a household to be in fuel poverty if:
they have required fuel costs that are above average (the national median level)
were they to spend that amount they would be left with a residual income below
the official poverty line
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The key drivers behind fuel poverty are:
The energy efficiency of the property (and therefore, the energy required to heat
and power the home)
The cost of energy
Household income
Is it a good definition? – old definition – A fuel poor household is defined as one
which needs to spend more than 10% of its income to heat its home to an
adequate standard of warmth.
Prepayment Meters
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People on these are likely to be poorer
Typically pay 10% more for energy - £200-£300 more
Don’t have an choice of tariff if they have to be on one
"If you pay your bills in advance in most industries you don't pay
more than other customers," said Transact's Christine Quigley. "Prepayment meters are a good way for many people to pay – we just
don't see why those people should be penalised.“
• Lead to vulnerable people being disconnected as they can’t add to
meter. One in every six prepayment meter customers has cut off
their energy supply because of high costs, difficulty topping up or
faulty meters, finds Citizens Advice.
• Higher bill can’t reflect increased cost of this way of paying surely!
Winter Fuel Allowance
• A payment of between £100 and £300 tax-free to help
pay heating bills if you were born on or before 5 July
1952. This is known as a ‘Winter Fuel Payment’.
• Most payments are made automatically between
November and December.
• You usually get a Winter Fuel Payment automatically if
you get the State Pension (most people get this so it is
a universal benefit) or another social security benefit
(not Housing Benefit, Council Tax Reduction, Child
Benefit or Universal Credit).
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• Universal benefit
introduced to support
pensioners who can be
some of the poorest
people in society
• Pensioners more
vulnerable to illness etc
resulting from cold
weather
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• Costs government in
excess of £2bn per year
(opportunity cost, adds to
budget deficit)
• Estimated that over 90%
of those who get it are
not in fuel poverty
• £22m a year goes to
expats many of who live
in hot countries.
Government plans to stop
this
Possible Questions
• To what extent are UK energy prices too high? (12
marks)
• Assess the likely effects of rising energy bills on the
UK Economy (12 marks)
• Analyse 2 reasons why the UK government might
intervene to reduce energy prices (8 marks)
• Assess the case for the UK government intervening
to reduce energy prices (20 marks)
• To what extent should the UK government should
intervene to reduce energy prices? (20 marks)
• Assess the case for the UK government paying cold
weather payments to vulnerable people (10 marks)
• Analyse two reasons why of those in debt on their energy
bills, 41% owe more than they did 12 months ago - evidence
H (8 marks)
• Assess the potential impact of rising levels of energy bill debt
on the UK economy (12 marks)
• Analyse two reasons why UK income might be unevenly
distributed (8 marks)
• Evaluate the role of fiscal policy in reducing the poverty trap
(20 marks)
• To what extent should the government intervene to reduce
inequalities of income in the UK (20)
• Evaluate strategies to reduce income inequality in the UK (30)
• Evaluate the impact of UK inequality on business and the
economy (20)
• Evaluate the implications for business of policies to reduce UK
inequality (20)
• Examine the link between energy prices and inequality (12)