Other methods of promoting equity
Syllabus: Explain that governments undertake expenditures to provide directly, or to subsidize, a variety of socially desirable goods and services (including
health care services,
infrastructure that includes sanitation and clean water supplies),
thereby making them available to those on low incomes.
Tax revenues may be spent on a huge range of items (including the above). However, two of the most significant areas for government expenditure in developed economies are:
- Benefits to those out of work, sick, young or others unable to care for themselves (social security payments)
Benefits (social security) and pensions are known as transfer
payments because they take income from one set of people (eg those in
work) andtransfer these funds (ie there is no transaction involved) to other sets of people (eg old, infirm, unemployed etc) who are seen to be unable to look after themselves adequately.
A payment from a government to its citizens, for which no good or service is received in exchange. Governments use transfer payments as means of income redistribution by making payments under social welfare programmes, such as social security, old age or disability pensions and unemployment benefits. Transfer payments are excluded when calculating gross national product. A significant proportion of government expenditure is on transfer payments.
Syllabus: Explain the term transfer payments, and provide examples, including old age pensions, unemployment benefits and child allowances.
It is the combination of transfer payments and progressive taxes that has the most impact on income distribution.
Transfer payments are paid to the poorest and most vulnerable members of society and so will have a significant redistribution effect.
By giving people benefits/social security payments governments are:
- helping the less fortunate live more financially secure lives.
- increasing injections into the circular flow of income which will be subject to a multiplier effect increasing aggregate demand in the economy.
- expecting some of the expenditure to re-enter the government funds via the taxes benefit recipients pay.
Provision of Social infrastructure
Governments spend tax revenues directly on providing social infrastructure including:
- Health service
By making services, such as education and health servies, available to people on low incomes, at zero or reduced prices, poverty is reduced and a more equitable distribution of income is achieved. This will certainly be the case if public servies are funded through a progressive tax structure.
Government may provide subsidies to those on low incomes to fund consumption of certain goods and services provided by the private sector, such as concessionary bus and train fares.
Syllabus: Evaluate government policies to promote equity (taxation, government expenditure and transfer payments) in terms of their potential positive or negative effects on efficiency in the allocation of resources.
Remember: To evaluate, is to `Make an appraisal by weighing up the strengths and limitations`, so you need to be prepared to:
- look at strengths and weaknesses of less intervention (less tax and benefits, smaller government)
- look at strengths and weaknesses of intervention (greater taxes and benefits, more government)
- look at strengths and weaknesses of each approach compared with each other
For an excellent presentation of some of the arguments about taxation as a policy you can look at
Basically tax the rich more they will not notice and the poor need help (Krugman)
Tax the rich less because they then will have the incentive to work harder and everyone will benefit from the trickle down effect (Mankiw)
May 2013 TZ1
3. (a) Explain why the market system may not result in an equitable distribution of income. [10 marks]
(b) Evaluate government policies to promote equity in terms of their effects on efficiency in the allocation of resources. [15 marks]
2. (a) Explain how a government could bring about a more equal distribution
of income. [10 marks]
(b) Evaluate the effectiveness of government policies designed to reduce inequalities in income. [15 marks]
May 2011 TZ2
2. (a) Explain two policies a government might use to redistribute income. [10 marks]
(b) “Measures to promote greater income equality should be a key feature of government economic policy.” Evaluate this proposition. [15 marks]