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Income Inequality in the United Kingdom - Essay Example

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This paper "Income Inequality in the United Kingdom" focuses on the fact that income in the UK is subject to a number of forces. Many of these are market side and indicated in the initial income that someone is able to earn. This amount can range from the hundreds to millions of pounds. …
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Income Inequality in the United Kingdom
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Download file to see previous pages There are four main ways that the government impacts a person or family’s take-home income in the United Kingdom: cash benefits, non-cash/in-kind benefits, direct and indirect taxes. These factors impact different levels of income very differently. Typically (though not always), benefits have an inverse relationship to income (going up as income goes down), while taxes have are directly related to income, rising as income rises. These factors, however, tend to be logarithmic rather than linear, increasing and decreasing at rates disproportional to changes in income. Taxes tend to rise at a greater rate than benefits decrease. For instance, at the lowest quartile of income, a family would earn 1,920 pounds of direct income but would get in the order of 4.5 thousand pounds of tax benefits, plus around 3.5 thousand pounds of benefits in kind. For the top quartile, with an income of 39,370 pounds, these benefits would drop to the order of one thousand and two thousand pounds respectively. Thus, from the bottom to the top quartile benefits drop to about one-quarter of their rate for the bottom quartile. Taxes, however, change at a much more rapid pace. The lowest quartile of tax-payers pays only about 790 pounds of direct taxes, plus indirect taxes in the order of 1,170 pounds. Someone in the top quartile would pay more in the order of 10,000 pounds indirect taxes, plus an additional 5,000 pounds of indirect taxes. This whole system means that for people in the lowest three quartiles, (anywhere up to about 13,000 pounds annually) actually take home more than they make after accounting for benefits and taxes, while people in the top two, making between twenty and forty thousand dollars, take home a lot less. Assessing the tax burden is a somewhat complicated question. If one compares only taxes to original income, clearly the poorest pay the greatest taxes – almost as much in taxes as they make. However, once benefits are accounted for, they pay much less, only about one-quarter of their income in taxes. The top quartile, when taking everything into account, bears the greatest tax burden, given that they pay both the largest absolute amount and the highest percentage. Furthermore, they benefit less from the taxes they pay than others – they pay taxes that go to supporting people in the lower quartiles. They, however, still retain the highest disposable income by a large margin, and thus their “tax burden” is less burdensome than a much smaller amount would be to a lower income person. Finally, it is interesting that the total percentage of taxes paid does not change drastically from the lowest to the top quartile once benefits are accounted for – each group pays about 1 out of every 4 pounds made to the government. The people in the lowest quartile certainly gain the most from this system. They gain a net of approximately 6,000 pounds, or 300 % of their initial income when all is said and done. This advantage drops precipitously as income rises: someone making 5,000 pounds annually, despite making more than 3,000 pounds more than the bottom quartile, only takes home approximately 1,000 pounds more at the end of the day. This means that the benefit from the system drops from 300% to under 100%.   ...Download file to see next pagesRead More
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