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  • Writer's pictureEvelyn Chen

Decreasing the Income Inequality Gap

One way the government can decrease the income inequality gap between less educated people and more educated people is by increasing government spending on healthcare and education. This includes the funding of the NHS and primary and secondary education. The funding of health and education improves the level of skills and health in the workforce, which are rewarded in the labour market; unlike the NMW, government spending does not directly control the income flow of workers like the NMW does.

On the other hand, government failure means that government expenditure might be inefficient at improving the health and education of low-skilled citizens, thereby failing to alleviate income inequality. Regarding education, information gaps may happen because the government cannot predict what skills will be required in the future job market. For example, the government did not realise that the job market would be dominated by the technology industry and so did not train students in computer science or ICT. As a result, many workers were poorly prepared for the jobs market when they graduated.

Furthermore, even if the education system produced a productive workforce, there might not be a great demand for highly skilled workers in the UK. For example, there might be a greater demand in the workforce for low-skilled, low-paid jobs such as hair-dressers than demand for a high-skilled, high-paid job such as law. This might happen in light of Brexit, where low-skilled workers from places such as Poland will find it harder to gain employment in the UK. Increased spending on healthcare and education might not play a prominent part in reducing income inequality because there will always be a demand for low-paid jobs in society.

Because wealth affects the level of income someone receives and vice versa, the government should also alleviate wealth inequality. Those on higher incomes can accumulate wealth through savings, buying shares, getting a mortgage to purchase a house, etc. whilst those with lots of assets can receive incomes such as dividends from shares or interests from savings. Wealth is usually more unevenly distributed than income as it is accumulated over a lifetime and wealth increases with age as it is accumulated during one’s working life. Indeed, in 2013 the wealthiest 10% of households were 4.3 times wealthier than the bottom 50% of households combined, and the wealthiest 20% of households owned 62% of total aggregate wealth. The top 1% own around 1/5 of all household wealth in the UK.

This wealth inequality is exacerbated by people who tend to pass on their wealth to their children. In order to alleviate wealth inequality, an inheritance tax was introduced. The standard inheritance tax rate is 40% on wealth worth more than £425,000 if the parents wish to have children or grandchildren. Inheritance tax reduces wealth inequality by reducing the amount of wealth that can be passed on to their children, who arguably have not earned that wealth. Moreover, allowing people to inherit large amounts of wealth from their parents discourages work and entrepreneurial activity. Furthermore, inheritance tax is one of the very progressive taxes remaining, and without it, Warren Buffet argued that ‘democracy would turn into a plutocracy’, with the vast majority wealth and thus power concentrated into a few families.

Some argue that the inheritance tax is a government failure due to unintended consequences. It may encourage wealthier families to become more adept at tax avoidance, resulting in wealthier people avoiding the inheritance tax whilst the rest of society receive reduced public services as a result of the lost revenue in tax. Nevertheless, according to figures released in 2016 by the Office for National Statistics (ONS), the government received the highest annual intake of inheritance tax receipts in history. The ONS looked at receipts for the 12 months up to February this year and £4.6bn was raised in inheritance tax revenue for the 2015/16 tax year.

The annual revenue has doubled compared to the £2.3 billion raised during the 2009/10 tax year. The Office for Budget Responsibility (OBR) data reveals the number of family estates on which inheritance tax must be paid has grown, from around 15,000 in 2010 to more than 40,000 this year. Therefore, the inheritance tax actually alleviates poverty despite people avoiding tax—perhaps the government has tightened loopholes in the tax system.

People often end up in poverty if they are on a low income and own little wealth. From 2015 to 2016, around 15% of the population was in absolute poverty whilst 18% of the population was in absolute poverty. The rate is higher than developed countries such as Denmark but still lower than many other countries such as Korea and the USA. Elderly people are particularly vulnerable to poverty because they are dependent on their savings and pensions for income. Indeed, while the number of pensioners living in poverty has fallen over the last decade or so, there are still 1.6 million pensioners living in relative poverty, which is 1 out of 7 pensioners.

However, pensioners are now less likely to be living in low-income households than non-pensioners. This is because pension has steadily increased above inflation whilst income for working-age adults was no higher than eight years ago. Indeed, as of 2014/15, government welfare spending on pensions makes up 42% of the total budget. Whilst this alleviates poverty for the elderly, perhaps affecting the amount of government expenditure left for alleviating the poverty of working adults and children.

Children make up the largest share of people in relative poverty— 30% of children are in relative poverty compared to 20% of adults and 16% of pensioners. This might be because children are dependent upon their carers for their standard of living and cannot easily find a job to support themselves. In order to alleviate child poverty, the government established the Children’s tax credits in 2003. The Children’s tax credits can be claimed by people who are responsible for children regardless of whether they are in or out of work; households on lower-income receive a greater amount through the Child Tax Credit system. This helps people escape the poverty trap by encouraging adults to find jobs or work longer since their benefits would not be taken away if they find work.

Despite this, there will always be a withdrawal zone where benefits are being removed as incomes rise and the existence of this zone provides less of an incentive to work more hours or take better jobs, thus rendering the poverty trap argument less valid. Moreover, the system is very complex and thus there is a large administrative cost associated with the level of bureaucracy.

In conclusion, I think that the UK has been effective in lowering absolute levels of poverty but not at lowering income and wealth inequality. Whilst I think that the government’s policies should try to eliminate absolute poverty, I do not think that the government should eliminate inequality because that would be impossible in a free-market capitalist society like ours. Income inequality inevitably occurs in our society since not everyone has the right skills to gain a high-paid job. For example, the level of skill required to become a top footballer is much higher than that required of a cleaner. Moreover, without income inequality, workers would not be incentivised by the rewards of higher earnings to become more productive, which thereby reduces the rate of economic growth.

Therefore, I think that training workers to enter into what the government believes are highly-paid industries does not actually alleviate poverty and inequality. Instead, the government should use the benefits and tax system to redistribute wealth and income whilst enforcing rules such as the NMW to prevent companies from exploiting low-skilled workers. For example, I think that wealth inequality is unfair because the recipients of the inheritance did nothing to earn their high standard of living and the inheritance could be used by the government to benefit the rest of society, for example by increasing defence spending.

Indeed, studies have shown that societies with high levels of inequality suffer from more negative externalities such as greater levels of crime, lower social cohesion, and worse public health. In fact, the UK government should follow the example of Norway. Norway’s HDI value for 2013 was 0.955, positioning it first out of 144. It is no coincidence that in Norway, progressive taxes which redistribute income are also very high—personal income tax can reach up to 55% whilst corporate profits tax ranges from 28% to as high as 78%. Norway also has a very low level of inequality: in 2013 the Gini coefficient was 25.8, making it one of the lowest-ranked countries out of 187 others. Therefore, if it wants to improve the well-being of its citizens, the British government should redistribute income and wealth in order to lower inequality.

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