Income Inequality
Essay Writing Skills - IGCSE Example 1
Case Study - A country with 1% of its total population is holding 60% of its total income making the other 99% population poorer. Regardless to mention that below 30% are living in absolute poverty which means their income cannot even help them to fulfill their basic needs. At this time, the government of that country does not have any tax policy that can take the below 30% population out of absolute poverty.
Income Inequality
Considering the data above use your concepts from economics and assess whether any relevant tax policy can help to distribute the income among the whole population equally to overcome the poverty issues in the country.
There is no doubt that a large part of the population will leave in poverty if 60% of the total income of a country goes to only 1% of the total population of that country. This means that the income distribution in the country is hugely unequal, and that government needs to implement proper policies to overcome the income inequality and poverty related issues.
Anyway, before I get into the assessment, let me first introduce some of the relevant and key concepts that are needed to assess the case study. Such key concepts are as follows, income inequality, Progressive tax, and poverty.
Income inequality is the income gap between the rich and poor households that share the total income of a country. Income inequality leads to poverty in any country.
Poverty is the economic condition of the households that are either living below the national standard income or with an income that cannot satisfy their basic needs (food, shelter, and clothes) fully. Absolute poverty states the economic condition of the households with an income that cannot satisfy their basic needs fully. The World Bank defines it as the economic condition of the people who are living on an income of less than $1.90 per day.
Income Inequality
As to mention about the relevant tax policy, Progressive taxation seems to be useful to deal with income inequality.
Progressive taxation is one type of direct tax that goes higher with the income going higher and goes lower with the income going lower. This means a portion of the income that is paid in tax increases with the increase in income and the tax rate. Whereas the portion of the income paid in tax decreases with the decrease in income and tax rate.
Income Inequality
As we have already come to know that the unequal distribution of income leads to poverty, it becomes necessary to distribute the income equally. This means actions are to be taken to reduce the income among the rich and increase the income among the poor. In this regard, a progressive tax is helpful as it imposes higher tax on people with higher income and lower tax on people with lower income. This is how the income gap could be decreased in the country.
To get into the deep analysis, tax revenues generated from the higher tax imposed on the 1% rich population can be used to transfer to the poor population in the form of transfer benefits or any other means such as providing cheaper public transportation, and healthcare facilities or providing better education.
Tax revenues collected from the rich and then spending on education will be a great move as it will improve the potential among the poor people and make them skillful and be able to find high paid jobs leading to a decrease in the number of people living in the poverty. Whereas, spending on healthcare would also be beneficial to the poor population as they are the people who mostly suffer from various diseases like malaria or dengue due to their poor living conditions. If cheap healthcare facilities are provided, then they will be healthy to take part in the job for a long time leading to be able to earn more and improve their living standard. This may cause average productivity among workers to increase fueling the economic growth of a country.
Nonetheless, the progressive tax also encourages people to join the labor market as they may benefit from the lower tax imposed on them leading to higher disposable income thereby reducing the poverty among the 99% of the population.
However, increasing the progressive tax may not be popular among the 1% rich population as they will term it as an anti-industrialists move by the government. This may discourage them to earn further and may halt any expansion plans (they might have) that might have created more employment opportunities. This may hinder some people from coming out of poverty as there may have fewer job opportunities due to less or no private investment spending.
Remember the 1% population does not only enjoy 60% of the total income, they also enjoy the benefit of the accumulated wealth they have (due to higher income over the years). If the domestic market is no more attractive to them due to progressive tax, then, they may shift their assets to a foreign country where tax rates are flexible to them. This may aggravate the situation poverty related issues.
Furthermore, progressive tax may also discourage foreign companies to invest. As their income may also fall under the progressive tax leading to paying higher taxes on their income (if it goes beyond a level). This may again not be helpful if the country is willing to decrease poverty as it would drive the foreign investment out of the country leaving no ways to increase the income among the poor population.
To conclude, I must say that the progressive tax has got its pros and cons but that depends on the implementation in the country. It is possible that the rich population may have political connections that may hinder the implementation of the progressive tax. They may choose to bribe the tax collectors or show their income lower in the financial reports to avoid the higher income/corporate taxes. As a result, the objective of the progressive tax may not be achieved leaving the income inequality in the country to be survived. Besides, we cannot ignore the adverse effect of the progressive tax. If the adverse effects outweigh the benefits, then progressive tax may have unintended consequences.
Considering all sides, I may suggest the country to come up with any other solution than using the progressive tax as a tool. Instead of higher taxes, the government of the country may focus on improving the potential among the people by allocating more funds in the fiscal budget to education. It is seen that the country which has got more unskilled workers are prone to have more people living in the poverty. Through the spending on education, the government can improve the skills of the population making it attractive for businesses to invest or set up new firms. This may ultimately lead to higher income among the people leading more people to be out of poverty.
Arguably, in order to spend more on education, there is a need for additional funds which a government may have to collect by raising the taxes which may bring the adverse effects anyway. As a result, a government may have to find a balance where they can increase the tax on higher-income groups without making them unhappy and then spend it on education or healthcare based on their necessity.
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