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c) Evaluate the view that the benefits resulting from a more equal distribution of income exceed the costs. Distribution of income is the variance between the highest and lowest incomes within an economy. The costs and benefits depend on the current distribution of income, if there is a large distribution of income then it has more effect than if it’s currently more equal, which the question doesn’t state. One argument could be that to reduce income inequality, then the government could increase the income tax rate for the rich, and decrease it for the poorest to create a more equal balance of incomes. If this were to happen then there would be more social welfare, as more people have the incomes to satisfy their need for necessary goods such as food and water. The HDI is a measurement of welfare in an economy which takes into account distribution of income, so a more equal distribution benefits that measure. However, since the government would have to take away from the richest quintiles of income, and it is the rich in the economy that provide the skilled labour. “Governments in most of the world’s industrialised countries have cut their top tax rates because of worries about the disincentives they create.” (Extract C, lines 3-4) A higher tax rate may create a disincentive for those workers to stay in the country, and move to a country with lower tax rates, causing a “brain drain” in the economy. A second argument could be that to help the people currently in poverty become more skilled and employable, they need to execute supply side policies to increase the education & training received by those in poverty. However, one major problem with this is that many are stuck in the “poverty trap”, and the children of those already in poverty aren’t likely to go to school and receive education as they are not enforced to, and see no benefit to it as of the way they have been brought up in life. This makes it challenging for governments to get their supply side policies to affect those in poverty, and the poverty trap remains. There is also the opportunity cost to the government of what they could have spent money on instead of supply side policies to help distribution of income. Due to the difficulty of applying these policies for those in poverty, and the opportunity cost of using them, people within the economy could benefit less overall, as the effect of the supply side policies may have less of an effect than, for example, spending on the NHS where everyone who already uses the service will benefit (Including those in poverty), meaning there could be a greater positive effect. Thirdly, if a government increases tax rates for the richest to help distribution of income, then the richest also has less incentive to expand their businesses to produce more and become more competitive, representing the economy becoming less productive and growing less. However, “Recent US tax cuts have so far reduced rather than increased, the share of tax revenue from high earners” (Extract C, lines 7-8). This quote from the extract contradicts this theory, however there isn’t enough information included in this to evaluate the effect fully, for example if the data is taken over a month, then the tax revenue received will decrease as the tax rate has, and the market may not have had time to react sufficiently to the tax cut. It should also be considered that increasing the income of the poorest in the economy doesn’t represent an increase in productivity of the economy, so the government must reduce its total tax revenue to receive less productivity (since the rich have less incentive to produce more, and the poorest won’t increase production). The poorest won’t increase production in an economy as they are the ones working for the firms, the firm has a limited demand for low skilled jobs, increasing the income of these workers won’t increase their productivity. Also, a reduction in income tax for the poorest may not see them become that much better off, as their incomes are already small, so a cut in tax doesn’t give them that much extra money. For example, if someone earns £3,000 of taxable income, and the income tax for that band is cut from 20% to 15%, they only save £150 over a year. Whereas, if the rich are given the incentive to expand and produce more, and increase their demand for labour, if more people are receiving jobs and getting paid more, than that is more beneficial. In conclusion, the costs of attempting to create more equal distributions of income outweigh the benefits for the economy. If the government tries to artificially redistribute incomes to create more fairness, then the economy is less productive, so overall it isn’t sustainable for them to make incomes fairer. However, if the government creates the foundations for the rich and businesses to produce more, rather than creating disincentives for their production, then those firms will start to demand more labour and wage rates will start to rise, which allows the poor to benefit more than they would from the government intervening with tax cuts. If everyone is equal, then there’s no incentive for anyone to try and be more productive and earn more, and poverty will increase as services begin to degenerate as no one has the incentive to improve them and provide the tax to improve them. Therefore, some inequality will always have to exist, to ensure that the market increases everyone’s welfare over time. So, while relative poverty within the domestic economy may not change as much as the government could make it change, everyone – including the poorest – will increase in welfare and income at a better rate relative to what they would be earning.