2. a) Explain two policies a government might use to redistribute income.
Progressive tax – This is a tax where higher income groups have to pay a greater
proportion of their income as tax. Income groups are generally sorted out into tax
brackets
For example,
Taxable income
0 -10,000
10,001 – 25,000
25,001 – 50,000
% paid as tax
0
20%
30%
This helps to redistribute income as the disposable income of the poorer people will
increase whilst that of richer people will decrease.
Transfer payments –These payments include different types of assistance (aimed at
increasing income) that the government provides to certain groups of people in order to
better their living standards.
Examples include things such as unemployment benefits and pensions. These
payments are generally made through the use of tax revenue.
Effect of these measures could be represented by a Lorenz curve shifting inwards
towards the line of perfect equality.
b) “Measures to promote greater income equality should be a key feature of government
economic policy.” Evaluate this proposition.
Strengths of greater income equality measures:
-
-
Better standards of living for the poor due to their lower income tax.
Measures like the progressive tax rate increase tax revenue for the government.
Depending of the government’s use of these funds, living standards can then
become better for the population – especially the poor who measures like
healthcare and education would most benefit.
Better and education could then lead to a greater quality and amount of labour in
the future, potentially shifting the LRAS curve to the right.
Weaknesses
-
-
Measures such as labour legislation aimed at ensuring a fair wage and provision
of social security leads to cost-push inflation as firms’ costs of production rise
and the SRAS curve shifts to the left, leading to decreased output and increased
prices.
Measures like labour legislation also lead to unemployment as firms hire less
workers for lower output.
-
Measures like progressive taxes also lead to less firm activity, again shifting the
SRAS curve to the left.
In weighing the strengths and weaknesses of the effects of such government measures,
it can be seen that whilst such measures could lead to increased potential output in the
Long run, in the short run, it results mainly in lower output, employment and inflation.
Further evaluative perspectives can be seen from the main goals of the government.
The five main macro economic goals of governments are as follows:
-
High employment/Low unemployment
Economic growth
Price stability
Equal income distribution
Balance of Payments balance
It can be argued that achieving the goal of income distribution equality comes at the cost
of higher unemployment, slower growth and inflation. This could then lead to the
conclusion that measures aimed at increasing income equality should not be a key
feature of government policy.