Blogger: Yetunde Akiode (Management Economics)
Income inequality: the fight between rich and poor
The UK stands as the second richest country in Europe, with a GDP of $2.7 trillion in 2020.Despite the riches and wealth apparent, problems such as income inequality exist; the richest 20% are 100 times wealthier than the poorest 20%, and their annual income is five times greater. Increasing income inequality taking place in Western economies over the last couple of years has coincided with many structural changes in the economic system. (Goudswaard, 2001).
Prime Minister Boris Johnson vowed in 2019, that there would be no rise in the rate of income tax, VAT, and national insurance. However, fast forward to 2022, the population is about to experience a 1.25% increase in NI tax. How will this increase affect those already struggling with their current income? Do government policies contribute to the issue of income inequality? And is there anything that can be done?
Impact of regressive taxation policies
Today there are several policies that are deepening inequality in the UK. The £20 uplift in universal credit that was introduced to help families cope with the effects of the pandemic has been cut. Though this move may be temporary, in the context of growing inflation and MP pay rise, cutting support to families is especially unjust.
In addition, to the cut in universal credit “plunging 840,000 people into poverty”, we are also witnessing an increase in NI tax that will lead to individuals having less disposable income. If people are paying more money to the government, that is less money in their pockets for them to live on. With the costs of goods and services also rising due to inflation, usual expenditure is already set to increase, talk less of now adding an increase of tax into the equation.
Although NI tax is alleged to be progressive, it favours the higher earners as employees earning above £50,000 per year will only be paying approximately 2% of their wages in tax.(Musgrave, 1959) highlights that tax rates have a direct effect on disposable income levels, as well as spending behaviour. It is said that the key is the level of tax progressivity and its redistribution of income imposed before and after taxes. If those on higher incomes still obtain a large amount of their income after paying tax, whilst those on lower incomes obtain a minimal amount of their income because of the immense sum taken due to tax, this is further enhancing income inequality.
With the threshold for national insurance contributions being frozen for the next five years, lower paid workers will now be drawn into paying taxes sooner, as their wages will rise with inflation.Even though, on paper it looks like they are earning more, in hindsight they are not as the increase in wages is simply to counteract inflation. Again, as the costs of goods and services are rising, new wages are still likely to be just about enough for one to afford basic necessities.
Another issue with the UK’s taxation policies is that it does not address high levels of in-work poverty in the UK. Over the past couple of years, it was revealed that those suffering from poverty the most were individuals that had some sort of income. This goes to show that even though people may have jobs, if policies in place alongside inflation mean that they have hardly any disposable income left, they will still find themselves struggling financially, therefore contributing to the inequality gap. Younger people will be particularly affected as before the pandemic under 35s were already spending nearly two thirds of their income on essentials.
Is there a solution? What can be done?
The most obvious solution would be government intervention. However, as we have seen from above, they do not always promote equity and reduce inequality as they should and sometimes even enhance the problem.
For government intervention to be effective, there needs to be a progressive tax system in place where proportionally more is taken from those on a higher level of income, whilst welfare is then distributed to those on a lower level of income. Although the UK is said to have a progressive tax system, it can be argued that in regard to high earners it is actually regressive.
According to researchers at the London School of Economics, one policy that has played a crucial role in reducing wage inequality is the introduction of national minimum wage. Research found that the lowest paid 10% of employees in 2019 were paid up to 63% of the average wage, whereas 20 years earlier it was 55%. From the following statistics, it can be deemed that the aim of this policy was fulfilled; helping remove the problem of pay disparities.
To conclude, it can be said that government policies indeed contribute to the matter of income inequality. Despite policies such as minimum wage being present, that have helped reduce income inequality via ensuring that those on a lower income are in line with national living wage, is it enough? This is one strategy in the midst of many, that unfortunately are actually enhancing this problem. More needs to be done and stricter guidelines need to be put in place to hold the government accountable. If they are not implementing plans that successfully assist the public in living more comfortable and efficient livelihoods, there should be repercussions, and no, waiting till the next general election is not enough.
