Government Intervention to Redistribute Income (Edexcel IGCSE Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Methods to Redistribute Income
Government intervention aims to reduce inequality and poverty through:
Progressive taxation
Using benefit payments to increase income of the poorest households
Investing in education and healthcare
Some countries have a stronger focus on the redistribution of income than others
E.g Nordic countries like Norway and Sweden focus on taxing higher income earners, providing benefits payments and investing into education and healthcare, leading to lower inequality and poverty
The aim of governments is not to have an equal distribution of income but rather a more fair or equitable distribution of income
A blend of policies is the most effective way to tackle poverty and inequality
Progressive Taxation
Tax systems can be classified as progressive or regressive
A progressive tax system redistributes income from those with higher income to those with lower income
As income rises, a larger percentage of income is paid in tax (called the marginal tax rate)
Most countries have a mix of progressive (direct taxation) and regressive (indirect taxation) taxes in place
The benefits of a good progressive tax system are sometimes lost to society because the high number of regressive (indirect) taxes worsens income inequality
E.g High VAT rate
An explanation of tax systems
System | Explanation |
|---|---|
Progressive  |
|
Regressive  |
|
Progressive tax systems are built around the idea of marginal tax rates
The calculation of an individual's personal income tax requires several calculations
Using this system, a salary of £60,000 would attract a tax bill of £11,500, calculated as follows:
Calculating a tax bill using the UK progressive tax rates from 2022
Tax Band | Taxable Income | Tax Rate | Tax Paid on £60,000 |
|---|---|---|---|
Personal Allowance | Up to £12,500 | 0% | 0 |
Basic Rate | £12,500 to £50,000 | 20% | £37, 500 at 20% = £7,500 |
Higher Rate | £50,00 to £150,000 | 40% | £10,000 at 40% = £4,000 |
Additional Rate | Over £150,000 | 45% | 0 |
Total Tax Paid on £60,000 |
|
| £7,500 + £4,000 = £11,500 |
Once the tax revenue is received by the government, redistribution often starts with the provision of free education and healthcare
Many governments use tax revenues to provide multiple levels of financial support to poor households, including disability payments, heating subsidies, travel subsidies, etc
An evaluation of progressive taxes
Advantage | Disadvantage |
|---|---|
|
|
Worked Example
The table below shows rates of taxation for country X
Income ($ per year) | Rate of Income Tax |
|---|---|
1–10,000 | 5% |
10,001–18,000 | 10% |
18,001–35,000 | 20% |
35,001 and over | 30% |
This is an example of what type of taxation system?
A. Sales tax
B. Corporation tax
C. Progressive tax
D. Indirect tax
Answer: C. Progressive tax
The table shows that as income rises, a larger percentage of income is paid in tax
A is incorrect as sales tax is one specific figure e.g. 20%
B is incorrect, as corporation tax is one specific figure, e.g. 17%
D is incorrect as an indirect tax is one specific figure, e.g.VAT of 20%
Benefit Payments
Benefit payments are usually given to the poorest and most vulnerable in society
They include unemployment and disability payments, pension payments, heating discounts, public transport subsidies, child benefits, etc
E.g In Denmark, social welfare is high compared to other countries. Income is transferred to low income households through unemployment benefits and housing assistance
An evaluation of benefit payments
Advantages | Disadvantages |
|---|---|
|
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Investment in Education and Healthcare
Investing in education and healthcare is a supply-side policy
It increases the potential output of the country (shifts the production possibility frontier outwards)
Education helps to reduce inequality and poverty by providing individuals with the necessary skills and knowledge to access better employment opportunities
Healthcare leads to a healthier workforce that is more productive
An evaluation of investment in education and healthcare
Advantages | Disadvantages |
|---|---|
|
|
Examiner Tips and Tricks
In paper 2, you will often be asked to evaluate how progressive taxes, benefit payments or investment in education and healthcare will impact inequality or poverty in a given scenario.
Make sure you have a balanced argument and consider the impact on multiple stakeholders (high- and low-income households, producers and government). Also, consider that a blend of policies may be the most effective way to tackle poverty and inequality
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