Cambridge International as and a level Economics Ebook

Universal benefits: 
benefits that are available to all 
irrespective of income or wealth.
KEY TERMS
Through the tax system
Th
e tax system can be used in order to reduce 
inequalities in income and wealth. Th
is is specifi cally 
through the use of 
progressive taxation
. Progressive 
income taxes lead to those earning higher incomes being 
taxed a higher percentage of their income than those 
on lower incomes. In some economies the top rate of 
income tax might be as high as 80% compared to other 
rates of 40% and 20%. Th
us income diff erentials are 
reduced. Most income tax systems are like this example 
and are therefore progressive in nature. Th
e average rate 
of tax rises as people earn higher incomes. Th
e main 
problem, however, is that for some people, the result is a 
disincentive to work and possibly even to live in a high 
taxation regime.
Indirect taxes such as a general sales tax on products 
tend to be 
regressive
. They have to be paid for by all 
who consume and so have no potential for redistributing 
income. Rich and poor people pay the taxes at the 
same rate.
Progressive tax: 
one where the rate rises more than 
proportionately to the rise in income.
Regressive tax: 
one where the ratio of taxation to income 
falls as income increases.
KEY TERMS
Taxes can also be imposed to reduce wealth inequalities. 
One example is inheritance
 
tax. Individuals who inherit 
more than a certain amount of wealth have to pay some of 
the value of that wealth in tax to the government. Another 
similar example is that of capital gains tax, whereby a tax 
is payable on the fi nancial gain a person may have made 
in the time that an asset such as property or a fi nancial 
portfolio has been owned. Th
e overall impact of such 
measures remains modest.
Other policies
A further way of reducing inequalities in society is for 
the government to provide certain important services 
free of charge to the user. Such services are fi nanced 
through the tax system. If such services are used equally 
by all citizens, then those on lowest incomes gain most 
as a percentage of their income. Inequality is thus 
lowered.
Th
e two most signifi cant examples of such free 
provision in many economies are health care and junior 
and secondary education. Th
ese markets are characterised 
by various market failures. However, these failures do 
not, according to standard economic theory, justify free 
provision to the consumer. Th
e justifi cation must be on 
the grounds of equity. Th
e view is that everyone should 
have access to a certain level of health care and education