Addressing income and wealth inequality
Income vs wealth
- income is a flow — money received over a period (wages, rent, interest).
- wealth is a stock — assets owned at a point in time (houses, shares, savings).
- They are linked: wealth earns income; saved income builds wealth.
- Inequality comes from differences in skills/wages, ownership of wealth, inheritance and unemployment.
Practice
Classify each as a flow or a stock.
Income is received over time (flow); wealth is assets held at a point in time (stock).
Policies to reduce inequality
- a progressive tax takes a larger % from higher incomes.
- benefits (transfer payments) go to the poor, old and unemployed.
- state provision of free education and health raises poorer people's real living standards.
- Together = redistribution — but a trade-off: very high taxes may weaken the incentive to work.
Practice
A progressive tax:
Progressive taxes take a higher % as income rises, narrowing the after-tax gap.
Practice
Very high taxes and large benefits can weaken the incentive to work.
Redistribution reduces inequality but can reduce the reward for working and investing — a trade-off.
You've got it
Key idea
- income = a flow; wealth = a stock of assets
- reduce inequality with progressive tax, benefits, and state provision → redistribution
- the trade-off: heavy taxes/benefits can weaken work incentives