do you agree that the distribution of income should be made
more equal solely through the use of progressive taxation and
transfers? Justify your answer. (25 marks)
Progressive taxation is when the proportion of income tax increases as
income increases thus the marginal rate of tax is greater than the
average rate; this enables a more equal distribution of income.
However criticism could be made for the progressive taxation policy
and there are other policies which may aid in a more equal distribution
of income such as the national minimum wage and government
supply-side schemes to improve education and training
Firstly progressive taxation closes the wealth gap as when income
increases so does the tax rate. For example in the UK the lowest band
with earnings up to £32,000 are taxed at 20% whereas the highest
income band earning over £150,000 are taxed at 45%. Consequently
this redistributes income with more equality and gives the government
higher tax revenues, some transferring in the forms of welfare
spending therefore closing the income and wealth gap.
However, it can be argued that it is unfair for the higher income
earners to be taxed harshly only for their income to be distributed to
lower income earners as welfare bene ts. This may create
disincentives for people to aim for high income jobs or become
entrepreneurs, typically requiring greater skill and quali cations, as a
large quantity of the income will be taxed away; by extension this will
decrease the UK’s competitiveness and wealth compared with other
countries in the long run. Thus it can be considered that progressive
taxation and transfers should not be the sole instrument for a fairer
distribution of income. A system of regressive taxation maybe
considered for example VAT where the tax added on items is xed
(currently at 20%) for all income earners, though this may be
considered unfair to the low income earners. Progressive and
regressive taxation discourages the equity concept whereby
distribution is fair and just as it can be argued that for example a
window cleaner should not be earning as much as a surgeon thus
progressive taxation can be considered as not a fair system. However
equity carries a value judgement as there may be con icting opinions
on what ‘fair’ is.
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