8.2 Equity and redistribution of income and wealth
- Syllabus
- 9708–2026–2027
- Topic
- 8.2
- Level
- A2
Learning objectives
8.2.1Equity vs equality• Difference between equity and equality8.2.2Equity vs efficiency• Difference between equity and efficiency8.2.3Absolute vs relative poverty• Distinction between absolute poverty and relative poverty8.2.4Poverty trap• The poverty trap8.2.5Equity/equality policies• Policies towards equity and equality, for example:- negative income tax- universal benefits and means-tested benefits- universal basic income
Equality is sameness; equity is a judgement about fair treatment or outcomes
Equality means giving people the same treatment, resources or outcome. Equity means judging what is fair, which may require different treatment to account for needs, barriers or contributions.
A policy can increase equality of income while reducing perceived equity, or improve equity through targeted support without making incomes equal. The criterion must be stated rather than assumed.
Giving every learner the same textbook is equal; providing accessible materials to a learner with a visual impairment may be more equitable while using different resources.
Equity is not a synonym for equality, and a measured equal outcome does not prove the process or opportunity was fair.
Efficiency and equity can conflict, but the trade-off depends on the policy
Efficiency concerns maximising or avoiding waste of resources; equity concerns the fairness of distribution or opportunity. A policy can improve one without improving the other.
Redistribution may reduce inequality but weaken incentives or create administrative costs; an efficient market outcome may leave people without a socially acceptable share. The size of the trade-off is empirical, not a universal rule.
A progressive tax can finance education that raises opportunity and productivity, potentially improving both equity and efficiency; a badly designed tax may reduce work or investment more than the gain.
“Efficient” does not mean fair, and “equitable” does not automatically mean economically wasteful.
Absolute and relative poverty use different reference standards
Absolute poverty means lacking resources to meet a defined minimum standard of basic needs. Relative poverty means having substantially fewer resources than the typical or median household in the society.
Absolute measures track purchasing power against a threshold that may be updated; relative measures reflect participation and inequality within a society. A person can move above an absolute line while remaining relatively poor if others’ incomes rise faster.
If a household’s real income doubles but the median income triples, absolute hardship may fall while its relative position worsens.
Neither measure alone captures every dimension of deprivation, and “poor” is not determined only by a single income number.
A poverty trap makes extra earnings produce little or no extra disposable income
A poverty trap occurs when a low-income person earns more but higher tax, withdrawn means-tested benefits and added work costs absorb most or all of the increase, leaving little incentive or ability to raise disposable income.
\Delta Y_d=\Delta\text{gross earnings}-\Delta\text{tax}-\Delta\text{withdrawn benefits}-\Delta\text{work costs}
An extra 100ofwagesmaycreate20 extra tax, 65ofwithdrawnhousing/otherbenefitsand20 of childcare/travel cost. Disposable income changes by 100−20-65−20=-$5: the worker is worse off despite earning more.
Means testing concentrates support on low incomes but creates benefit-withdrawal ranges. If these overlap with income tax and work costs, the effective marginal deduction rate becomes very high. The person may reject extra hours or a better-paid job even though gross pay rises.
| Reform | How it weakens the trap | Main trade-off |
|---|---|---|
| Raise the tax-free allowance/lower tax on low earnings | More of each extra dollar is retained | Less revenue or redistribution elsewhere |
| Taper benefits more slowly/integrate tax and benefits | Reduces the combined withdrawal rate | Extends payments to higher incomes and raises fiscal cost |
| Higher real minimum wage or skills/childcare/transport support | Raises net reward or reduces work cost | Employment, employer-cost or budget effects depend on design |
| Universal benefit/UBI | No benefit withdrawal as earnings rise | Much larger gross cost and payments to non-poor households |
The poverty trap is not simply income below an absolute poverty line and is not evidence of laziness. It is a marginal incentive problem created by the interaction of earnings, tax, benefit withdrawal and necessary work costs.
Redistribution policies trade targeting against coverage, incentives and cost
| Policy | Mechanism | Main strengths | Main limits |
|---|---|---|---|
| Negative income tax (NIT) | Below a threshold, the tax system pays a fraction of the income shortfall; payment tapers as earnings rise, then positive tax begins | Integrates tax/benefits, targets low income and can preserve a positive gain from work | Taper choice creates fiscal cost or a high effective marginal rate; needs income administration |
| Means-tested benefit | Eligibility/amount depends on income or wealth | Directs spending toward greatest measured need at lower gross cost | Take-up gaps, stigma, complex administration, errors/fraud and poverty-trap withdrawal |
| Universal benefit | Everyone in the eligible category receives the same payment, regardless of income | High coverage, simple, little stigma and no means-test withdrawal | Pays high-income households and has high gross cost; tax may be needed to recover payment from the rich |
| Universal basic income (UBI) | Regular unconditional cash payment to every individual | Simple income floor, broad security and no withdrawal when earnings rise | Very high cost at an adequate level; tax funding and possible labour-supply/inflation/opportunity-cost effects |
Progressive direct tax and transfers redistribute current disposable income. Free or subsidised health, education, training, childcare and transport can improve opportunity and productivity over time; minimum wages or stronger worker bargaining can raise earnings but may affect employment or prices. Indirect taxes are often regressive unless essentials are protected or revenue is recycled.
Judge the policy by poverty reduction, post-tax income distribution, access/opportunity, take-up, work and investment incentives, administrative accuracy, fiscal opportunity cost, time and incidence. A lower Gini coefficient indicates greater equality, but whether the resulting distribution is equitable remains a social judgment.
A practical package can combine a broad income floor with progressive tax, targeted extra support for disability/housing costs and supply-side access to health, education and employment. This can reduce gaps without making every income equal, but overlapping withdrawal rules must be checked for a poverty trap.
Universal does not mean perfectly equal, and means-tested does not automatically mean more equitable: actual incidence, take-up and incentives matter. NIT and UBI can deliver similar net income patterns after tax, but NIT is income-tested through the tax schedule while UBI is paid unconditionally before tax.