Distribution Of Income In The Uk Economics Essay

Distribution Of Income In The Uk Economics Essay

The major purposes of this study are to explicate why the distribution of income in the UK is so unequal ; to propose ways in which the distribution can be made more equal ; and to measure the economic sciences benefits and costs of the types of intercession, and province which signifiers of intercession are the most effectual overall.

First, allow us specify income and the distribution of income. Income is the amount of earned income and unearned income. Earned income is money earned through employment e.g. rewards, wages, committee, fillips, net net incomes ( if self-employed ) . Unearned income is income received other than income received in return for services. These include involvement, dividends, rent, and capital additions.

The distribution of income is how equally the income is distributed, it is improbable to be efficient or just in a free market economic system and the huge differences can do market failure. It will intend that some people will populate in both absolute poorness and comparative poorness. Fig. 1 shows the Lorenz curve, it shows the grade of inequality of income in a society. The farther from the curve is from the 45A° line, the greater the grade of inequality. For case, the bottom 50 % might merely gain 20 % of the entire income, whereas the top 10 % might gain 40 % of the state ‘s income.

Fig. 1

Why is the distribution of income so unequal?

There are several grounds why the distribution of income in the UK is really unequal some of which are described below:

The most obvious ground is that people have different occupations offering different wages. A Brain Surgeon will be more skilled than a shelf-stacker and therefore will gain a higher overall wage. The pay rate of a given worker will fluctuate in conformity to the supply of workers for that peculiar business and the demand for workers for the business. If the demand for a occupation rises or the supply for a occupation falls or both, the pay rate will lift and vice-versa: this causes wage to differ and hence some people receive more original income than others. E.g. Brain Surgeons are really limited supply but extremely demanded, whereas shelf-stackers are available in copiousness but the demand is much lower.

No. of workers






No. of workers






Fig. 3

Fig. 2

Fig. 2 – high and inelastic demand ; and low and inelastic supply

Fig. 3 – low and elastic demand, and high and elastic supply

The unequal distribution of wealth can hold a large consequence on the distribution of income. The wealthiest people in the population will hold many assets which they can utilize to bring forth more income. These can include rent, involvement, and dividends. This causes the rich people to go even richer and widens the spread between hapless and rich. Some people will inherit assets which can so be used to roll up incomes. Not everyone will inherit assets and this makes people ‘s income differ, as unearned income is likely to be much greater for those will the assets.

If a household is without anyone who is in paid employment this could do a serious job as they would be trusting on state-benefits ; this one time once more causes inequalities as they will evidently have lower incomes ( on the whole ) than those who work.

How incomes are measured can falsify inequalities. Income can be measured per person or per family. For case, an single gaining a high wage may be in the low income bracket if he / she has a big household to support and is the lone income generator as income per individual in the family will be low. Whereas, if all of the household were to work and convey place a ‘low wage ‘ they would still non be classed as low paid because collectively they would accomplish a high wage.

The sum of chances an single receives can impact the distribution of income. For illustration, it has been proven that in many hapless countries the per centum of pupils who decide to go on on to farther instruction is really low. This is because at the clip of devouring the good they are incognizant how it can profit them ( deserve good statement ) and prefer to travel directly into employment to ease their exceptional demand for income to be bought into their household and this barbarous rhythm may take to a deficiency of makings relative to the middle-class pupils and may earnestly halter them in happening a well paid occupation. Due to the fact they are hapless they see income as more of a precedence than instruction, of class they are unmindful to the fact that instruction itself could take to better future chances. This can take to the rich go oning to be rich and the hapless go oning to be hapless.

Another factor that can take to differences in income is pay favoritism in the workplace. Females have traditionally earned less than work forces. In the past, work forces have been given more educational chances than adult females, and this will hold an authorising consequence on the income. Some employers may be biased when make up one’s minding whether to use a adult male or a adult female, due to the logical thinking that adult females take calling interruptions to get down households.

Fig.4 – the consequence on wage due to sexism in the workplace.

No. of workers







D1 = MRP


Fig. 4

Fig. 4 shows the differing demand for labor for work forces and adult females. Since the adult females are non demanded every bit much as the work forces ( with a difference of Q to Q1 ) the pay rate beads for adult females from WM to WW. This could be a factor that affects the distribution of income for families in the UK.

Natural endowments and aptitudes can hold an consequence on the distribution of income. Some people are academically gifted and this will heighten their opportunities of acquiring good makings and acquiring good making will let them to come in a wider array of occupation markets and therefore have a better opportunity of acquiring a higher income. Peoples who are non as gifted may stop up with small or no making which will earnestly halter their occupation chances and opportunities of acquiring a well paid occupation.

Table 1 – Average incomes, revenue enhancements and benefits by quintile groups of ALL families, 2005/06*








Average per family ( ? per twelvemonth )

Number of families in the population ( ‘000s )

4 956

4 961

4 961

4 961

4 960

24 799

Original income

4 234

10 762

21 631

35 788

68 704

28 224

Direct benefits in hard currency


2 792

3 503

2 521

1 632

1 065

2 303


3 709

3 324

2 306

1 277


2 252

Entire hard currency benefits

6 501

6 827

4 827

2 909

1 712

4 555

Gross income

10 736

17 589

26 459

38 697

70 416

32 779

Direct revenue enhancements and Employees ‘ NIC

Income revenue enhancement


1 316

2 915

5 255

12 935

4 561

lupus erythematosus: Tax credits3







Employees ‘ NI parts



1 208

2 077

3 276

1 445

Council revenue enhancement and Northern Ireland rates4




1 057

1 239

1 006

lupus erythematosus: Council revenue enhancement benefit/Rates discounts








1 019

2 296

4 763

8 223

17 400

6 740

Disposable income

9 717

15 294

21 695

30 474

53 016

26 039

Indirect revenue enhancements

Taxs on concluding goods and services

1 040

1 187

1 593

1 945

2 362

1 624

Intermediate revenue enhancements

Commercial and industrial rates







Employers ‘ NI parts







Duty on hydrocarbon oils







Vehicle excise responsibility














Entire indirect revenue enhancements

2 885

3 359

4 389

5 577

7 598

4 762

Post-tax income

6 831

11 934

17 307

24 897

45 417

21 277

Benefits in sort


2 755

2 070

1 997

1 799

1 194

1 963

National wellness service

3 703

3 924

3 455

3 063

2 571

3 343

Housing subsidy







Rail travel subsidy







Bus travel subsidy







School repasts and public assistance milk








6 658

6 143

5 568

4 962

3 904

5 447

Concluding income

13 489

18 078

22 875

29 859

49 321

26 724








*Adapted from Table 14A, 2005/6 ONS.


This subdivision of the coursework will propose ways in which the distribution of income in the UK can be made well more equal. I will utilize ‘table 1 ‘ to assist demo existent life effects of revenue enhancements and benefits and analyze different methods of intercession. This piece of revenue enhancement analysis secondary beginning was adapted from the ONS web site.

Tax Analysis

The authorities uses different types of revenue enhancement in the UK. There are two types of revenue enhancements direct and indirect revenue enhancements. Direct revenue enhancements are the revenue enhancements that are levied on the income and resources of persons whereas indirect revenue enhancements are the revenue enhancements on goods or services. Officially indirect revenue enhancements are revenue enhancements that are imposed on the manufacturers put most of the clip the load of paying the revenue enhancement is thrust upon the consumers. The extent of the load will depend upon the monetary value snap of demand and monetary value snap of supply of the merchandise.

Tax can be besides put into three classs with respect to redistribution effects. Progressive, Regressive or Proportionate revenue enhancement ; progressive revenue enhancement is taking a higher proportion of revenue enhancement from higher income groups. Regressive revenue enhancement is the antonym of progressive revenue enhancement and involves taking a higher proportion of revenue enhancement from lower income groups. Proportionate revenue enhancement involves taking the same proportion from all income groups.

This construct is shown in Fig.5 below:

Progressive Tax

Regressive Tax

Proportionate Tax


Tax as a per centum of income

Fig. 5

One would believe that progressive revenue enhancement such as income revenue enhancements do assist to redistribute income as the gross from the revenue enhancement can be handed out as benefits to the hapless people ; these are known as transportation payments. However, free market economic experts believe that this method consequences in a loss of freedom and the authorities takes away what is justly people ‘s difficult earned money. Other economic experts believe that ‘the jurisprudence of decreasing fringy public-service corporation ‘ is the best manner forward to increase the overall public-service corporation of the state. For case an excess ?10 per hebdomad to a hapless household will travel a batch further than ?10 per hebdomad to a rich household. This implies that the addition from the hapless household in benefits is far greater than the revenue enhancements lost from the rich household of the same value. Therefore, it can be said that progressive steps can be given out to the poorer people via benefits and therefore bridging the spread of life criterions of people in Britain and can assist to relieve comparative and absolute poorness. Fig. 6 shows income revenue enhancement as a proportion of gross income of all the quintiles.

Regressive revenue enhancements do non assist to redistribute income every bit good as progressive revenue enhancements as they take a higher proportion of revenue enhancement gross for the lower income groups. Most regressive revenue enhancement is a consequence of demerit goods. Fig. 7 shows responsibility of baccy as a proportion. There must be some kind of revenue enhancement on such demerit goods to discourage people from devouring it, so one could reason it acts as a deterrence to devour baccy. In some instances, regressive revenue enhancement can assist redistribute income despite taking a larger proportion from the lower income groups. The rich are likely to pass a batch more money on certain points for case vino and liquors. In 2005 / 2006 the bottom quintile spent ?89 in indirect revenue enhancements on vinos and liquors ( 0.9 % of overall disposable income ) whereas the top quintile spent ?273 on the same ( 0.5 % of disposable income ) . Although, the ingestion of vinos and liquors harmed the poorest people the most by taking away a bigger ball of their disposable income the ?273 generated in revenue enhancement gross by the rich people could happen its ways into the hapless people ‘s pockets in the signifier of transportation payments.

Fig. 6 – Progressive step

Fig. 7 – Regressive step

Using direct revenue enhancement for redistribution will of course negatively affect inducements to work. If an person if faced with a rise in direct revenue enhancement he / she can respond in two ways. Since the net wages for work has fallen he / she will take to replace work for leisure clip ; in this instance the revenue enhancement has proved to be a disincentive to the worker and a strong permutation consequence is prevailing. Alternatively, the worker could work longer hours to keep the station revenue enhancement income ; in this instance the rise in direct revenue enhancement has acted as an inducement to work longer. There is a strong income consequence here and this will better end product in the economic system.

In pattern the later is likely more evident in the UK due to the huge bulk of workers holding to pay rents, mortgages, and other measures.

Should the permutation consequence be stronger, the ‘Laffer Curve ‘ below shows how an increasing revenue enhancement rate does n’t automatically take to higher revenue enhancement gross.

Up to t % revenue enhancement a rise in the rate of revenue enhancement leads to a rise in gross, nevertheless if the revenue enhancement rates rise above T % so the revenue enhancement gross really falls due a strong disincentive consequence. So it can be concluded that merely because the authorities raises revenue enhancement rates it does non automatically take to higher revenue enhancement gross. The factors which affect the gross are the extent to which the permutation consequence is prevailing and where in relation to t the revenue enhancement rate is.

The redistribution of income via benefits and revenue enhancements can adversely impact the economic system as the hapless who are content on having benefits will non hold any inducement to travel and work longer hours, this is known as ‘the poorness trap ‘ . Although the hapless people in inquiry may derive excess income from working longer hours they will besides lose benefits and therefore this acts as a disincentive to happen work. For case, a worker may be given the chance to work an extra 10 hours in a hebdomad for ?50 ; nevertheless he / she might besides hold to pay extra income revenue enhancement or national insurance and may besides lose benefits. He /she might merely stop up with ?20 for an excess 10 hours work. The hapless people would much instead non work than be paid a measly ?20 for 10 hours work. Similarly, the unemployment trap concerns the unemployed people. The unemployment trap occurs when workers calculate that because of lost benefits and excess revenue enhancement they are no better off working and alternatively they choose to stay outside the work force and that manner they need non give 40 hours of leisure clip and still bask similar net income. The system is moving as a deterrence to work at all.

This will raise the rate of unemployment and can stem the degree of end product, and growing in the economic system. This may do hapless people on benefits to partake in unofficial occupations ; this is really bad for the economic system as these people would be victimizing revenue enhancement remunerators. Other people on benefits may acquire lazy and settle for the benefit payments, they might go excluded from the work force ; because they are unemployed for so long that they might go unemployable.

“ 30 % of UK families receive at least half of their income from province benefits. ” Is the UK promoting a dependence civilization?

To seek to work out this job, the labour authorities introduced a ‘Working Families Tax Credit ‘ . This enabled working households to gain a guaranteed minimal income and besides entitled to an freedom to income revenue enhancement for rewards below a threshold. Although this system appears to promote work it may move as a deterrence to work full clip, as parttime work could be every bit as rewarding.

High direct revenue enhancement particularly high fringy revenue enhancements rates can move as a monolithic deterrence to work excess. Workers will move in a assortment of ways, for case they may retire earlier to the exorbitant rate of revenue enhancement. Workers may be less likely to travel for publicities and this in bend creates less mobility in labour markets as workers are less willing to travel between occupations. There may be a deficiency of endeavor for new concern people or bing little concerns. Salvaging money in the bank may be deterred by high income revenue enhancement on involvement. If the income revenue enhancement is at such a flat whereby people think it is excessively much people will ever seek and happen loopholes in the system and may use specializer attorneies to bail them out of paying revenue enhancement. Some enterprisers may shirk the figures in the book and this will intend the authorities will derive less gross than if is unbroken income revenue enhancement to a minimal ; other people may travel to a different state to avoid revenue enhancement Torahs. One possible solution to this job is to clamp down on non-domiciles and shut the loopholes. Non-domiciles pretend to populate in foreign states and have offshore histories. Another better solution is to maintain direct revenue enhancement to a minimum and possibly that manner the authorities will really derive higher gross from revenue enhancement as fewer people will trouble oneself to conceal their incomes.

The heritage revenue enhancement is presently levied at a astonishing 40 % on all estates worth more than ?300,000. Keeping the thresholds unmoved despite a lodging roar has been a stealing gambit by the UK authorities. Since, the mean house monetary value in the UK is now about ?300,000 a batch more people qualify to pay this proportion of revenue enhancement. This means the mean heritage revenue enhancement is around ?120,000! This decidedly helps to redistribute income as it efficaciously takes huge sums of money from the rich people and hands it out to the hapless people, but what are the effects of this to the whole economic system? If the threshold remains unchanged for excessively much longer it may move as a deterrence to salvage and a deterrence to travel up the belongings ladder. It wo n’t impact the really rich at all as they will be able to get away it so the middle-class and lower middle-class will be hit the most as they might be unable to get away it. Many feel that it is a signifier of dual revenue enhancement as the estates were acquired for earned income which has been taxed itself. The authorities may desire to look at forestalling revenue enhancement equivocation and shuting the loopholes that have cost them one million millions of lbs.

In the October 2007 pre-budget study the new Chancellor of the Exchequer Alistair Darling, showed his proposed positions on the heritage revenue enhancement system. The threshold for married twosomes would duplicate from ?300,000 to ?600,000. If this new system to be put into topographic point it would surely intend a batch less people would measure up to pay the heritage revenue enhancement. This might intend less revenue enhancement is generated from the rich in order to pay set to reassign payments. The deficiency of gross generated by the authorities may set added force per unit area other signifiers of revenue enhancement. For case, Darling besides outlined programs to revenue enhancement the revenue enhancement the mega affluent male monarchs of private equity by raising the rate of capital additions revenue enhancement from the current bottom degree of 10 % to 18 % . This will hit besides concern though, irrespective of the size and will cut down due to the rate of revenue enhancement about duplicating it will no doubt cut down the fancy of get downing a new concern.

Benefit Analysis

There are two types of benefits ; cosmopolitan and means tested. Cosmopolitan benefits are available to everyone within a certain standards, for illustration ‘child benefits ‘ . Meanss tested are available to people who can turn out their income is below a given threshold, for illustration ‘family recognition ‘ . There is an statement that child benefits should be targeted at the hapless the most and so would surely assist to redistribute income better. Many of the agencies tested benefits require a drawn-out procedure in using for them and many of the people that are entitled to such benefits are non acquiring them particularly the old people as they are non cognizant of them. Means tested benefits help the hapless people the most whereas cosmopolitan benefits help everyone. It is all good and good shift to agencies tested benefits but if people are non cognizant of there being so it wo n’t help the redistribution procedure one small spot. Possibly greater advertisement of these benefits and concise, easy to follow application signifiers is the reply to this job.

A controversial statement with respect to the inequalities in income is the trickle down consequence and it is favoured by some supply-side economic experts. The theory is to allow the free market work independently and cut the high rates of income revenue enhancement and corporation revenue enhancement. Thereby enterprisers are incentivized to spread out and therefore more employment chances will originate and the multiplier consequence will let the income to dribble down to the hapless. There are defects to this theory as non all hapless people will hold the equal accomplishments to make the occupations created and the hapless people who can non work will be hit the most, and some people will still endure from absolute poorness.

Other economic experts believe that the authorities must step in as it can do jobs with the lower income households including haltering their kids ‘s instruction chances. The authorities has now introduced EMA, Education Maintenance allowance to all pupils who proceed to farther instruction under a certain income threshold. This system gives pupils an inducement to travel to school alternatively of come ining employment. Despite being controversial many more pupils stay on to school and it increases the supply-side of the economic system and more significantly gives the hapless people an chance to win and better their overall occupation chances and therefore pay chances without holding to worry excessively much about lending to the household income. There is a defect of this system as the EMA is besides available for pupils who fail their GCSE ‘s and return to post-16 instruction to recapture them, is this a inducement for pupils to neglect?

The authorities will besides supply benefits in sort to everyone. The graph below shows the benefits in sort for instruction.

This progressive step helps redistribute post-tax income every bit good as give the poorest a opportunity to acquire out of the trap of unemployment. Notice that the rich people do non acquire every bit much as the hapless in benefits in sort due to really few rich people go toing province schools. This is an illustration of ‘government disbursement on merit goods ‘ and such proviso additions equality of chances and will assist cut down poorness.

The National Minimum Wage and Legislation

The national lower limit pay statute law was introduced to redistribute incomes, but it may do a loss of employment, as houses will desire to use fewer workers at that pay rate. A NMW can increase the inducements to work for the poorest people, it will assist the low paid workers the most who stay in employment, but this does non needfully intend all hapless people will profit from this service. In add-on, the national lower limit pay must be increase in line with net incomes to hold any existent affect. For some low paid workers it will merely replace public assistance benefits and will make little in the manner of bettering life criterions, nevertheless it may intend that everyone is taxed less due the diminished demand of public assistance benefits. Some of the lowest paid workers are n’t needfully from the lowest income groups ; they could be parttime workers or pupils from a high income household. Some of the poorest people could lose their occupations in favor of the middle-class people. This does non assist to redistribute income. The NMW for 16-17 twelvemonth olds in well lowers than older age groups. It is ?3.40 for 16 and 17 twelvemonth olds compared to ?4.60 for 18-21 twelvemonth olds. This system acts as a deterrence for pupils to go forth school instantly and wait till they are 18 to come in employment. Along with EMA, this is an first-class gambit to entice the hapless into remaining at school for every bit long as possible and certainly by making so it will heighten long term occupation chances.

Legislation is an illustration of redistribute income. They can be used in a assortment of ways ; a good one is Equal Pay Act and Sex Discrimination Act which aim to cut down differences in wage between genders, nevertheless this policy does n’t halt prejudice within the workplace.

Regional Issues

Hiking employment is a hapless country could earnestly heighten the opportunities of the hapless people to acquire occupations and travel on financially. Enterprise Zones can besides assist, large investors can supply occupations for people in hapless countries, and this besides acts as an inducement for hapless people to even get down their ain house up. If the hapless acquire more occupations so they will necessitate less benefits and this will lesson the load on UK taxpayers ; so everyone is better off.


Looking back at the purposes of this study they were non merely to make up one’s mind which steps make the unequal distribution of income more equal but which will profit the economic system the most.

Fig. 6 clearly shows that progressive revenue enhancement such as income revenue enhancement helps to redistribute income by taking a higher gross and higher proportion of income from the rich people. This can be used for transportation payments and effectual give money that the rich have earned to the hapless. We can farther verify that this method of redistribution plants by looking at the direct impact of progressive revenue enhancements as shown in the tabular array below.

Bottom Quintile

Top Quintile

Income Before Tax

10, 736

70, 416

Income After Tax

10, 352

57, 481

Before this step the rich earned about six and a half times more than the hapless ; after entirely subtracting income revenue enhancement we can see a important consequence, the richest quintile now receive about five and a half times more than the bottom quintile. The overall difference between the top and underside is besides reduced from around ?60, 000 to ?47, 000, therefore shuting the spread between the life criterions.

If the purpose of this study was entirely to happen the most effectual manner to redistribute income so progressive revenue enhancement and benefit system would decidedly come top, but what deduction will this hold of the economic system as a whole?

In my sentiment this will merely make a dependence civilization as the hapless will sit back and take these benefits all twenty-four hours long! This may do the hapless lazy. A high rate of progressive revenue enhancement can take to revenue enhancement turning away and equivocation particularly from the rich man of affairs. Plus, high fringy revenue enhancement Acts of the Apostless as a immense deterrence to work longer hours, if to work at all. This can restrict the sum the state grows. Non-domiciles escape relative revenue enhancement via their privileged revenue enhancement position and cost the authorities an estimated ?1 billion, an obvious declaration to this job is to revenue enhancement these people to a great extent.

Regressive revenue enhancement takes off a higher proportion of the lower income groups ‘ income and frequently widens the spread between the rich and the hapless ( as already shown in fig. 7 ) . Having said that they do hold a critical function to play in moving as a hindrance to devour demerit goods such as autos and coffin nails.

Clearly the nature of the benefits given will hold a say in the redistribution of income, if more means-tested benefits are given out than cosmopolitan it will aim the poorest people and do the distribution of income more equal. But frequently it is non every bit simple as that as the deficiency of cognition and consciousness of these benefits count against the hapless. The hapless demand to be told about the benefits and given easy to follow paperwork.

The Tory leader David Cameron outlined ways to relieve the poorness and unemployment trap in a recent address, his thoughts will decidedly assist the redistribution of income and the improve province of the economic system. The unemployed people who are on benefits would necessitate to be actively looking for occupations. Searching for suited occupations would be arranged with the aid of the occupation Centres. If the unemployed individual was offered a occupation but he / she declined it for whatever ground so they would lose their benefits. This would set added force per unit area on them to happen a occupation alternatively of sitting at place lazily milking the tax-payers money! The working households ‘ revenue enhancement recognition can be used to good consequence by promoting work albeit part-time. However, superciliums can be raised as to whether this now acts as a deterrence to work full clip as portion clip work can be every bit honoring.

Promoting endeavor in the state can assist supply occupations for the unemployed and cut down the demand for every bit much revenue enhancement in the state as everyone will hold occupations.

Overall, to round off this issue I believe that progressive revenue enhancement is the best gambit to do the distribution of income more equal along with means-tested benefits. It is really of import nevertheless, to acquire these rights as excessively much in favor of the hapless people will make disincentive effects. The most effectual for the economic system as a whole is making occupation chances for hapless people as it gives them the opportunity to acquire onto the calling ladder and advancement, they surely can non win financially by remaining at place. The working households ‘ revenue enhancement recognition besides gives the inducement to hapless people to work. The fewer unemployed people the better, revenue enhancements will be lower for all of us as there will non be an exceptional demand to redistribute income, and it will take to higher end product, better life criterions, higher growing and better degrees of morale within the state ( less countries of depression ) . Giving people from disadvantaged backgrounds the chance to pupils besides provides chances for the hapless to acquire out of poorness. Puting force per unit area on the hapless people will coerce them to contend poorness.

Restrictions of Coursework

I have merely collected one chief piece of secondary research. Although the quality of research is really good, possibly more research would hold given a better image of the economic system. Having said that making a specializer subject such as the redistribution of income merely one piece of information is critical and that is the table screening mean incomes, revenue enhancements and benefits for the UK.

It is really hard to happen up to day of the month information and the earliest I could happen was the twelvemonth 2005/2006. So possibly I am covering with informations that is somewhat out of day of the month. Another possible defect with my coursework is that the secondary research may be biased. Many concerns may be loath to uncover their true degrees of net income for revenue enhancement grounds. Some people may hold unofficial occupations in which instance their incomes wo n’t be accounted for. Several factors may falsify the information.