The Issue With Taxation and Inequality

12/08/2016 13:54

When newspaper articles were emblazoned with headlines that the UK unemployment rate was its lowest in nearly 10 years to 5.2% in December 2015, the issues surrounding the UK economy from the migration crisis to income inequality seemed to slowly dissipate and seemed less worrying than a few months ago. After all, this was all that mattered right? When the complacency of the top bankers resulted in the global financial crisis in 2008, unemployment peaked at almost 2.7 million at the end of 2011 and pressure had been put on the government to reduce these unemployment figures to make the global perception of the UK economy stronger. Despite high economic growth and high employment rates pre-recession, the reckless and detrimental actions of bankers could not at all be rationalised to explain why the income inequality within the UK was incredibly vast which still remains an outstanding issue in today's society.

An indication of how unfair the UK system is the fact that the poorest 1% of households have a negative net wealth of more than £16,000 yet on the other end of the spectrum, the top 1% of households have a net wealth of more than £2.4 million. In an endless cycle of debt, these households struggle to not only find sufficient money to live on but to find employment too thus highlighting the inefficiency of the UK economy to deal with such issues. With the Tories promising to cut welfare benefits by £12 billion by 2017/18 in a bid to reduce the deficit, we seem to be under the impression that the government has chosen to cut all areas in general to increase the likelihood of the budget decreasing yet the government is still able to invest 6% of its GDP on Trident, therefore indicating that there is indeed room for the UK to still provide funds for these welfare benefits to an extent.

From a left-wing point of view, in a bid to reduce income inequality, the UK should implement progressive tax reforms, such as a Land Value Tax, which would help address inequality at root and redistribute power. At a glance, although Land Value Tax may seem popular amongst economists with Adam Smith stating that "nothing (could) be more reasonable" and Milton Friendman saying that it was the "least bad tax", they happen to be so rare. Given that land value taxation does not distort decision-making, there will not be a response in the supply side of the economy given that the amount of land is fixed. Unlike taxing labor directly which results in the discouragement of people from consumption and investment, a tax on land values is payable regardless of how the land is actually used. Thus, these payments (based on current market value) will raise the government's tax revenue resulting in the government being able to redistribute this money to those at the bottom and closing the gap between the rich and the poor. The fact that LVT is impossible to pass on in the form of higher prices, lower wages or higher rents enables the economy to still have substantial economic growth since it does not impact the components of aggregate demand (consumption, investment and spending) within the economy.

Thus, the implementation of these taxes seems to be the solution for the redistribution of income, although, it should be pointed out that this should not be the only route to tackle the ongoing issue of income inequality since that it should be used in conjunction with other policies in order to focus on the roots of this inequality.