Download Inequality economics question

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.