Redistributing Income

Redistribution is good…..

If we leave the economy to it’s own devices, it will become like the animal kingdom. Survival of the Fittest means there will be winners and losers. The problem is that this creates poverty, squalid conditions and crime with the victims being those who are disabled, unqualified or born into such a family. The general policy of an MDC(More Developed Country) is let the winners get the reward but have a minimum standard of living above the poverty line. Fairness, is the policy governments always mention, we will look at different types aimed at…

Vertical Equity is equal treatment for people of all classes and levels of wealth. The left wing attempt this with non discriminatory healthcare/education systems.

Horizontal Equity is ‘identical treatment for identical groups of identical workers’, which goes hand in hand with identical incomes. So everyone in the same road(houses equal) or the same customer service department has equal pay, help from the government and tax etc.

The Gini Coefficient and Ways to Reduce it.

The Gini coefficient is a measure of inequality in each economy. It is between 0 and 1, 0 being complete equality and 1 absolute inequality. To talk about the coefficient we need the Lorenz Curve, which is below.

What is the curve?? The lorenz curve shows a cumulative relation between the population, poorest first, and the percentage of the national income that the poorest percentage own. The Gini Coefficient is the area between the Lorenz curve and the diagonal line of equality. Why a diagonal is perfect equality, well, when everyone earns exactly equal incomes, cumulative national income increases the same per person. It is easy to see that the area is 0 when all are equal and 1 when the first 99.9% own nothing.

So How to Reduce Inequality?? We will see soon we must have a coefficient for an economy to have any order and use, but the problem is when the Gini is too near 1. Mostly the way to have more equalness is a progressive tax which takes from the rich and gives to the poor a bit, in businesses aswell as households. Non discriminatory provided public/merit goods such as policing and healthcare are a good way round. Indirect taxes on goods take up more of a poor man’s income, but if you were means-tested everytime you buy something it would be a huge waste of government funds, so this isn’t targeted so much.

Too much is not so good……

The problems of socialism all too much reveal that if you go crazy on this, it will really harm the economy in the long term. For more redistribution means higher taxes are needed, as we need more tax revenues, right? I will show you how the economy can be suffocated.

The Laffer Curve

To give more benefits/resdistribution per person we need a higher average tax per person. It can get excessive, however and the Laffer Curve shows the consequence of the harms to the economy when it does, creating lower tax revenues in the end.

If we tax working people too high, tax revenues go down, why is this a result of a suffocting economy??……

  1. A brain drain: In heavy redistribution, the high earners are taxed very high rates. They may get so fed up that they may emigrate, and when entrepreneurs and researchers are no longer here, a very high income to tax in gone, and so is fast progress soon after(we need great thinkers).
  2. Black Economy: If I were to tax you at 99%, and you like where you live(other factors too), instead of leaving, than you may declare you are getting half of what you really are to have a tax free 50%. Undeclared earnings are not taxed, and the higher earners usually know the best accountants. Also there may be a desire to go into an illicit trade(and keep 100%). Government loses out, so does the economy….
  3. Disincentive to work: In high redistibution, lower income people may find themselves having little more income working a 40 hour week than on their backside getting benefits. This creates high unemployment, and for the people who do work, very little motivation( see unemployment/earnings trap). Where is productivity, and tax revenues???
  4. No Investment: If there are any entrepreneurs left, they will be reluctant to produce much. In heavy redistribution firms profits will be taxed heavily, and many businesses may go under, harming employment/tax.

The problems above also come about with a too equal society, which kind of goes hand in hand with excess redistribution or ‘big government’.

So you can see we need a happy medium with redistributing. Too much, and we get the problems above, too little, and we get poverty and many other problems. Below are some definitions which follow on from the above problems from too much. Namely, for the lower income workers.

Unemployment Trap is where people are worse off when they take a low paid job than stay unemployed. Because they have an income, they cannot claim jobseekers allowance and may even have to pay national insurance and tax.

The Earnings Trap is where people may be in work, but stay on low pay as if they are promoted, they have to forego means tested benefits and possibly have to pay a higher tax %., leaving less income than before.

Trickle Down effect argues that, when the rich get richer, the poor become better off aswell. It revolves around more employment opportunites for the low paid when we have a nation of rich risk takers. Also multiplier arguments and wealth effects.

The left and right wing.

How income is redistributed is decided by the government, and this means it must depend on the way they approach things. There is loads to be discussed of left/right wing costs/benefits. This just looks at their redistribution.

Left Wing(Most extreme communism/socialism, less so Labour, Democrats): Looks to promote income equality and are the greatest redistributors. They also promote equality of the person, and often subsidise merit goods, trying to give an equal start in life. Absolute poverty is often avoided with the left wing. There are costs, however, typical of the former socialist Eastern Bloc economies and North Korea(of incentives, let alone many other things). If we try for a more equal society, than the best in their field will suffer and those which do nothing rewarded. Disincentives are made, and enterprise/high productivity can suffer. There are also the earnings/unemployment trap said above. More redistribution.

Right Wing(Conservative, Republicans less extreme). See inequality as healthy. They are often said to favour the rich and use the incentives argument of the pull factor to be rewarded for the seeds you sow. They use the trickle-down effect to explain that this creates jobs and income benefitting the poor. Typically, absolute poverty may be slightly higher for the incapable. The unemployment/earning trap is less likely as their typical policy is to lower benefits and lower taxes making it necessary for low skilled to work, whilst boosting the supply side and arguing that it avoids poverty. Less redistribution.

The main goal, making redistribution fair!! Or ‘equitable’. Each government tries to achieve what they see as the fairest outcome on the groups of society, and economic groups(assuming no corruption).

What Does the Government do in the UK??

We have had a more left wing labour government since 1997(has changed) and have certainly made more redistribution since they took power. In the UK, people on lower incomes have working tax credits, do not have to pay their national insurance if employed and do not have to pay tax on less than £6475 per year. Jobseekers allowance is given to the unemployed which are seeking work. Those out of work are given incapactitated benefits according to their disability. Also in the UK, we have a national minimum wage currently £5.80 ph. Incomes over £150000 per year are taxed %50.

Definitions…….

Absolute Poverty is when a family does not earn enough to have the basic necessities. Food, Water and Shelter. (Serious)

Black Economy: any buying and selling which is not declared to the inland revenues, hence generates no tax revenues. Mostly illegal(as if I sell my friend a car I wont be asked for tax). Includes obviously illicit trades, as there are no tax returns for prostitution……

Relative poverty is where we are poor compared to the typical person in our economy. Does not have to mean the person is in poverty. If I am relatively poor in Guam or Beverly Hills, yeah. Accepted definition is less than 60% of the median income. High relative poverty means high inequality.

Fuel Poverty where people cannot afford to pay energy bills needed to keep tehm warm in cold seasons. Common among old people on state pensions, less important to know(but useful).

Progressive tax system is where the richer are taxed a higher % of income and the poorer lower. This must be used to some extent to stop absolute poverty.

Regressive tax system is where the poor are taxed a higher % of their income than the rich. Taxes on goods are generally regressive as VAT etc is fixed, taking up more of a poor mans income when purchase is made.

A Flat Tax System taxes all levels of earning the same %. Slovakia, Poland and Latvia have the flat tax. No group of society is targeted, making it seem fair, also easy to operate and causes less high earners using accountants to declare lower figures(they are taxed the same, whats the point?).

The Marginal Tax Rate is, if you earn 1 more pound in gross income, what is you’re change in net income. If it is only 40p the marginal rate is 60%. Combines loss of benefits and higher tax etc. MTR>100% worse off, MTR<100& better off.

Fiscal Drag can happen where we have a progressive tax system. If brackets are not adjusted for some time, peoples wages changing with inflation means we have low paid finding themselves taxed a higher%, making them worse off. A staggered system must be closesly watched.

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One Response to Redistributing Income

  1. Pingback: Thinktank « Zahablog's Economic Page

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