Income and Wealth Equality Essay

Discuss whether the most effective way to have income and wealth equality is to tax income more progressively. Income is a stable flow of money, often a salary, which someone works for but this can also be made through interest on savings. This flow of money is often very unequal from person to person due to wage differentials, this then creates inequality. Wealth on the other hand is a stock of assets which have a market value, which may change over time e.g. houses or cars. These are often inherited but can be bought by someone through their income. Wealth and income often found together however someone who is wealthy doesn’t always have a large income. Their relationship with inequality is also very different with a lot more inequality found in wealth as a fifth of wealth is concentrated among the richest one per cent of households however there is still some in income. One way the government can stop this inequality is through a progressive taxation system that aims to tax the poorest people very little but make the money up by taxing the richer. This would work at several boundaries with someone income being taxed higher when it exceeds a certain limit. This then creates equality as the richer people have less money and the poorer have more from not paying tax and then the unemployed get benefits. This then reduces the budget deficit as the tax payers pay for people benefits, helping to reduce the class system. However one problem with this is that it may cause the highest earners to leave the country to avoid paying tax and companies moving their headquarters abroad where they will pay less tax. This happened in the 70s with the rolling stones but is also happening with corporations such Amazon and Costa and this something that may happen more if the richer are taxed too much. This is also taking money out of the economy as they spend their money abroad, out of the flow of income in the UK. Another problem with this system is that it creates ‘the poverty trap’. A type of government failure, this is when there is no incentive for people to get off benefits as they won’t make any more money. To stop this there may need to be a re-evaluation of the system as the replacement ratio is too high. This can also create poor attitudes, with generations of people not working. This is also found in the work place with some people refusing pay rises as they will have to pay more money in tax as they go through a tax boundary. However more recently this has happened with child benefits as these are being reduced depending on how much someone earns another reason why someone would refuse a pay rise. Wealth is often harder to tax however it is often caused by income so the tax system previously described may be used to reduce wealth and thus stopping inequality. This system can also be found in wealth though, with inheritance tax being used progressively. For example any money above 325,000 is taxed at 40%. This then creates a source of revenue for the government but also stops people inheriting huge sums of money, stopping inequality. However this system has its flaws as the tax has to be paid first, it could also be argued as unfair as someone who works for their money is entitled to leave it to who they want, especially as it was already taxed when it was earned. This system has also caused many pensioners to move abroad where what they leave is taxed less. The money inherited is also often used by entrepreneurs to fund businesses so the system may also reduce the possibility for future in income tax. This systems also sonly raises  £2.9bn a year, a mere 0.18% of GDP, which sometimes ends up being spent on court cases as people argue against the system. One alternative system for reducing inequality is by providing incentives for people to get into work. This could be done by changing the minimum wage as it would reduce the replacement ratio. This can also be achieved by reducing the unemployment benefits or making them harder to get. Reducing benefits would also lower the budget deficit as the government can save money. However this could be hard on people who genuinely can’t work due to long term illness or disability. Another way of increasing the work force is by increasing spending on training of workers but also in the education system. This will create better skilled and qualified workers, allowing them to make more money and giving them more job opportunities. This type of supply side policy can be expensive but there should be future benefits as their will be more money made from income tax. They would also create job opportunities for teachers or other people to teach skills. Other examples of this include apprenticeships and part time work schemes that together should create a job for everyone, reducing the tax bill. However they won’t work for everyone as there is always someone who will be left behind and It may also be hard to change the mind set of people who are used to not working. These types of policies would also all stop inequality as the poorer people would have employment opportunities giving them a higher source of income. However there are very little alternatives to redistribute wealth as it is impossible to give people items of value as those who are in poverty often don’t even have a house. The government may be able to provide schemes for people to work for their homes and other areas of wealth. It is also hard for them to find things of wealth at an affordable rate especially as it is normally found through work done by relatives. This is why it is unlikely to be done as it wouldn’t be very sustainable and effective however in theory the re distribution of wealth could be done. In conclusion the progressive tax system has its benefits as it provides a simple way of reducing inequality by taxing the rich and giving the poor money, bringing them closer financially. However in my opinion the system is the easy solution with short term benefits rather than long term gains that might happen through providing incentives rather than disincentives for people. However the problem with wealth is greater as it can’t be easily moved but through redistributing income wealth will consequently be redistributed as ultimately income is the main cause of wealth.