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Chapter 3.3 - Fair Distribution of Income (Key Definitions (Wealth = The…
Chapter 3.3 - Fair Distribution of Income
Key Definitions
Wealth
= The market value of all the assets owned by a person, group or country at a specific point in time
Distribution of Wealth
= How wealth is shared out between individuals and households
Income
= The reward for the service provided by a factor of production, including labor
Gross Income
= Income received before any taxes are taken or benefits given
Distribution of Income
= How incomes are shared out between individuals and households
Net Income
= Income available after the effect of direct taxes and benefits, often called disposable income
Asset
= A resource or item owned by a person or company regarding as having value
Types of Income
Interest
This is a reward people who hold extra money get for saving or lending
Profit
The reward for enterprise. Shareholders own a party of the company and receive equivalent parts on profits (dividend)
Rent
Owners of land and property gain income by letting others live of work in their property
State Benefits
Some people may have no job and rely on the govt. for their income
Wages
A fixed, regular payment for work or services. It depends on the level of supply and demand of labour
Why is Income Distributed Unevenly in the UK?
Reliance on benefits
Some households receive no income from wages, interest, rent or profits
These are the poorest households and include pensioners who only receive state pension, the disabled
Also include households that rely on other state benefits, benefits are much lower than normal wage
Age
Younger and older groups have lower average income than those in the middle
Young adults have not had time to work their way up pay scale
Older ones have retired
Difference in wages
Wage rate is determined by supply and demand of labour
There are great differences in wages of different households
When demand is high and supply is low, wage rate tends to be high and visa versa
Gender
Average income of females is lower than males
In UK there is equal pay for equal work by law but average income for females is lower
Usually because they take time out to raise children
Income-earning assets are distributed unevenly
Not all people and households earn all 4 types of income
People with lots of assets tend to have high income
Many receive little to no rent, interest or profit
Different Uses of Income
Group 1
Get little wealth in form of their car, tv etc.
Spend all of their income each month over the 5 years on consumer goods such as TV's, cars and services like holidays
Group 4
Spend some of their income, but save a lot or but it into business. Might start own business from scratch
Business could become very valuable asset increasing wealth
Group 3 spends a bit, but mostly sames
Group 2 saves a bit, but mostly spends
Why is Wealth Distributed Unevenly in the UK?
Purchase of Property
Some people own houses they rent to others
Company shares are parts of ownership of a company. People buy them so they rise in price and they increase their wealth
All forms of property are considered wealth
Enterprise
Some people have built up wealth through their own enterprise
They may have built up a business from scratch which earns them lots of money over time
Savings
Saving over time allows people to build up wealth overtime
Some people may have no savings
Once the poor buy their necessities, they have very little/no money left for saving
Inheritance
Rich have lots to pass on, poor have little to nothing to pass on
The wealth can continue through inheritance
In UK, some individuals and families have considerable assets
Evaluating Consequences of Differences in Income and Wealth for an Economy
Poor Housing
Low income households may live in rented accommodation, decreasing disposable income
Poor quality housing leads to illness
Poor Health
Poorest socity may suffer ill health due to poor diet and lifestyle
Lower life expectancy
Poverty and Deprivation
Some people may become homeless
Other's don't claim benefits so wont have minimum standard of living
Inequality of Oppurtunity
Often the poorest live in areas with poor education, healthcare and social protection
Therefore it's very difficult for them to life themselves out of poverty
Taxation
Proportional Tax
Takes the same proportion of tax from all income levels
Progressive Tax
Takes a greater percentage of tax from higher incomes (and/or takes less from lower incomes
Regressive Tax
Takes a greater proportion of tax from lower incomes (and/or less from higher incomes)
Problems with Redistribution
Some higher earners might move abroad to escape tax, leading to 'brain drain'
People in work may make decisions upon the effect of direct taxes. Might not seek promotion if most of money goes to govt in taxes anyway
High direct tax acts as disincentive for businesses to invest
If people find they can live well on benefits provided by govt, they might not bother to find work
Saving decisions affected by direct taxes on interest
What Measures does Government use to Redistribute Income and Wealth?
Inheritance Tax = Can redistribute wealth
Reducing Indirect Taxes = Indirect taxes are often regressive
Progressive Taxes
Government Spending and Redistribution = The government can increase spending on things which brings income inequalities down