Why are incomes unequal, and what can the government do about it?
The distribution of income and the causes of inequality, how the government redistributes income, and the difference between progressive, proportional and regressive taxes.
A focused answer for AQA GCSE Economics on the distribution of income, the causes of inequality, how governments redistribute income, and progressive, proportional and regressive taxes.
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What this dot point is asking
AQA wants you to explain what the distribution of income means, why incomes are unequal, how the government redistributes income, and the difference between progressive, proportional and regressive taxes. A fairer distribution of income is one of the government's wider objectives, so this links to fiscal policy and the labour market.
The distribution of income and inequality
The main causes of income inequality are:
- Skills, education and qualifications: better-skilled workers are scarcer and more productive, so they earn more (the labour-market link).
- Type of job: dangerous, highly skilled or in-demand jobs pay more than low-skilled jobs in plentiful supply.
- Wealth and inheritance: people who own assets (property, shares) or inherit money receive extra income from them.
- Age and experience: earnings often rise with experience over a working life.
- Discrimination: unfair treatment can hold some groups' pay below the level their skills deserve.
How the government redistributes income
The national minimum wage also lifts the pay of the lowest earners directly.
Progressive, proportional and regressive taxes
The key word is percentage. A regressive tax may take the same number of pounds from everyone, but because that is a bigger share of a small income, it hits poorer people harder.
The equity-efficiency trade-off
Reducing inequality can clash with growth. High taxes on top earners and firms may weaken the incentive to work, invest and take risks, and very generous benefits may reduce the incentive to find work. This is the equity-efficiency trade-off: a fairer share of income may come at the cost of a slightly smaller total. Governments must judge how to balance fairness against incentives.
Worked example
Try this
Q1. Define a progressive tax. [2 marks]
- Cue. A tax that takes a larger percentage of income as income rises, so higher earners pay a higher rate.
Q2. Explain one way the government can reduce income inequality. [3 marks]
- Cue. Benefits: cash transfers such as the state pension or unemployment benefit raise the incomes of the poorest, narrowing the gap between rich and poor.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20196 marksExplain the difference between a progressive tax and a regressive tax.Show worked answer →
A 6 mark question that wants the distinction explained, ideally with an example.
A progressive tax takes a larger percentage of income as income rises, so higher earners pay a higher rate. UK income tax is progressive: the rate rises through bands as income increases.
A regressive tax takes a larger percentage of a poor person's income than a rich person's. Many indirect taxes work this way: a fixed VAT or duty is a bigger share of a low income than a high one.
A strong answer states clearly that a progressive tax rises as a percentage of income while a regressive tax falls as a percentage of income, and gives an example of each. Markers reward the focus on the percentage (or rate) of income, not just the amount paid.
AQA 20219 marksDiscuss whether the government should do more to reduce income inequality.Show worked answer →
An extended-response question, so develop both sides and judge.
Reducing inequality can be supported: it can reduce poverty, improve health and education for the poorest, and may boost the economy because lower-income households spend a larger share of any extra income. Tools include progressive taxes, benefits and spending on public services.
However, there are costs: high taxes on top earners and firms may weaken the incentive to work, invest and take risks, and generous benefits may reduce the incentive to find work, both of which can slow growth. There is also a trade-off between equity and efficiency.
A strong answer weighs the case for fairness and lower poverty against the risk of weaker incentives, and reaches a supported judgement (for example that some redistribution is justified but very high taxes may harm growth). Markers reward developed chains on both sides plus a judgement.
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Sources & how we know this
- AQA GCSE Economics (8136) specification — AQA (2017)