Government Intervention to Affect Distribution Between Income and Wealth
- The extent to which a government intervenes to affect the distribution of income and wealth depends on:
- The extent to which it believe that the free market distribution would be inequitable
- The effects that such inequality will have on society
- The effects it believes any intervention will have on incentives and efficiency
- Economist who believe in the efficiency of markets do so because the believe that the differences in income act as signals which encourage workers to change jobs, and differences in wealth promote savings and investment
- The contrast, other economists believe that intervention is justified, as market forces won’t ensure an efficient allocation of income and wealth
- They believe low levels of income can affect the household a significant amount, like affecting the educational performance of the children
- Differences in wealth and income can also cause social division, as the poor may feel socially excluded.
Ways in Which Government Affect the Distribution of Income and Wealth
- Taxation
- The overall effect of the tax system is to reduce inequality
- Progressive taxes such as income tax make distribution more equal
- Regressive taxes such as VAT make distribution more unequal
- Provision of state benefits
- Means tested benefits reduce inequality and universal benefits form a larger percentage of the income of the poor
- Means tested benefits are provided to those whose income is below a certain level, and can come in the form as things like working tax credit
- Universal benefits are applied to everyone in a particular group, regardless of their income; all pensioners get a winter fuel allowance.
- Provision of benefits in kind
- These come in the form of health care, education, school meals, etc.
- The take-up of these benefits depends on the age of the household – a household with no children isn’t going to take up education and schooling, whereas an older household is likely to use the NHS more.
- Labour market policy
- NMW, anti-discrimination legislation, subsidising training – all of these reduce income inequality
- Macroeconomic policy
- Measures to reduce unemployment may benefit low-income households, and regional policy may reduce geographical inequalities of income and wealth
- Means tested benefits reduce inequality and universal benefits form a larger percentage of the income of the poor