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Chapter 3.3 Fair distribution of income (Other incomes: (Profit - The…
Chapter 3.3 Fair distribution of income
Taxation
Regressive tax
- Takes higher proportion of tax from lower income AND/OR takes a smaller percentage of a higher income (e.g VAT,Council tax)
Everyone pays same amount regardless of income
Proportional tax
- Takes same proportion of tax from all income levels
Everyone is charged with same % of tax
Progressive tax
- Takes greater percentage of tax from higher income AND/OR takes a smaller proportion of a lower income
Reducing wealth inequality
Key Terms:
Distribution of income
- How incomes are shared between individuals and households
Inequalities of income
- incomes are distributed unevenly, so some people have higher incomes than others
Other incomes:
Profit
- The reward for enterprise shareholders that own a part of the company: they receive equal part of profits(dividends)
State benefits
- Some people may not have a job - they rely on government for their income ie Jobseekers allowance
Interest
- Reward for saving or lending to those who hold extra money
Other Benefits:
-Child
-Housing
-Disability
Rent
- Owners of land and property gain income by letting others live or work in their property
Assets
- A resource or item owned by a person or company - regarded as having value
Difference between income and wealth
Income
- The reward for
service provided
Wealth
- The market value of all the assets owned by a person,group or country at a specific point in time
Income
- the flow of money received over time
≠ (NOT EQUAL TO)
Wealth
- stock of assets which are owned
How is income and wealth distributed in the UK
Gross income
- Income received before any taxes are taken or benefits given
Net Income
- Income available after effect of direct taxes and benefits, often called disposable income
Why there is difference between GROSS and NET incomes
Taxes and benefits
Government tries to redistribute income
Why is INCOME distributed unevenly
Reliance on benefits
- Some households receive no income from wages,interest,rent or profit
e.g pensioners with state income
Unemployment
- cause unequal income distribution as it is lower than average wage
Differences in wages
- People sell labour services in return for a wage
Different households receive different wages
Wage rate in labour markets are determined by demand for and supply of labour in market
Age
- younger/older age groups earn lower average income than those in the middle
Income-earning assets are distributed unevenly
- Not all households receive incomes as they do not have land,capital or enterprise. Assets ≠ income
Gender
- Average income of females < males
as women take time out careers to raise children
It is illegal to gender discriminate
Different uses of income result in different wealth
Group 1:
Use of income:
Spend income on consumer goods
Accumulated Wealth:
Little wealth at end of period
--------------------------G2,G3 in middle---------------------
Group 4:
Use of income:
Spend income on consumer goods and services by decide to invest some of their income into businesses
Accumulated wealth:
If successful, business becomes a significantly more valuable asset, increasing wealth
Inheritance
- Individuals and families can have considerable assets. Inequality can continue through inheritance as wealthy pass on assets.
Poor do not have any assets to pass on
Purchase of property-
Forms of property -considered wealth
Can earn income for owner
Income- more property bought -further builds wealth
Company shares
- part ownership of company - people buy shares when company price rises so increased wealth
Savings
- Savings earn interest. Some people have no savings, for low income households - once all necessities have been bough there is no income to save
Enterprise
- Putting idea into practice, if proved successful would increase wealth
Problems with redistribution of income
Workers not seeking promotion- People in work may make decisions base on effect of direct taxes
-Reluctant to apply for higher paid job
-Difference in post tax income may not be worthwhile
High earners: Move abroad to avoid tax
-UK government loses tax revenue
-Talented workers move abroad as tax rates are lower
causing "brain drain"
-UK economy loses their contribution to society
Saving decisions - Affect by direct taxes (taxes on income/profits ie income tax)may not be worthwhile
-Reduces government gets from tax
Benefits: If people live well being provided by government, they may not bother to seek work
-Disincentive to work
-Post tax income from work may not be higher than benefits gained by not working