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With the upcoming United Kingdoms election near by, David Cameron, the

current Prime Minister and leader of the Conservative Party proposed a plan to achieve
greater equality in the distribution of income. Distribution of income refers to how much
of an economys total income different individuals in a population receive (Tragakes). If
elected, Cameron promised to raise tax-free allowances from 10,500 to 12,500 and
raise the threshold at which people have to pay 40% tax on their income from 41,900 to
50,000.
By cutting taxes for low-income earners the tax system in the UK will become
more progressive than it already is. In a progressive tax system as income rises, the
fraction of income paid as taxes also increases (Tragakes). The more progressive a tax
system is, the more equal the after-tax distribution of income becomes, which can be seen
in the Lorenz curve in Figure 1.1. A Lorenz curve demonstrates the degree of equality of
income distribution by plotting the cumulative percentage of income received by income
shares of the population (Tragakes). The diagonal line in Figure 1.1 represents perfect
income equality. A curve closer to the diagonal line represents an economy with a greater
equality. The curve L1 illustrates the distribution of income in the UK right now. If David
Camerons proposal is implemented successfully, the Lorenz curve will shift closer to the
diagonal line to the L2 curve.

L2

L1

David Camerons proposition to lower income taxes is an expansionary fiscal


policy, which refers to manipulations by government of its own expenditure or taxes in
order to change aggregate demand (Tragakes). Aggregate demand is the total quantity of

goods and services that all buyers in an economy want to buy, over a particular time
period, at different possible price levels ceteris paribus (Tragakes). By lowering income
taxes, the aggregate demand will increase, as consumers will spend more due to greater
disposable income. An increase in aggregate demand can also correct recessionary gaps
that arise from an economic contraction, where there is a fall in real GDP and an increase
in unemployment of resources, lasting six months or more (Tragakes). The UK is
currently at a recession. Figure 1.2 demonstrates the effects of a cut in taxes on aggregate
demand and a recessionary gap. Due to the cut in income taxes, there is a greater
aggregate demand shifting the AD curve rightward from AD1 to AD2, allowing the
economy to achieve full employment of resources at Yp. Full employment refers to the
maximum use of all resources in the economy to produce the maximum quantity of goods
and services capable of being produced. This eliminates the recessionary gap.

One advantage of decreasing income taxes for low-income individuals is that the
tax system is more progressive and therefore a greater income distribution of income can
be achieved. Another strength is that expansionary fiscal policies can pull an economy
out of a recession, however the disadvantages outweigh the advantages. A decrease in
taxes does not necessarily mean that there will be an increase in consumer spending. In a
recession, people might be pessimistic about the future and choose to save instead of
spend. This will not increase the aggregate demand and the economy will remain at a
recession. Along with that the UK is already at a deficit. Deficits occur when government
expenditures are smaller than the tax revenues (Tragakes). By decreasing income taxes,
government revenues will also decrease inducing a greater government deficit. The

governments accumulation of deficits minus surpluses is referred to as government debt


(Tragakes). The government might be forced to borrow, increasing their debt.
Many are speculating that David Camerons intentions are highly political
because of the upcoming UK elections. By increasing 40p threshold and tax-free
allowances the government will be cutting down on its revenues, worsening the deficit,
which may force the government to cut down expenditures including transfer payments.
Transfer payments are payments made by the government to individuals specifically for
the purpose of redistributing income (Tragakes). If Camerons main goal were to achieve
a greater equality in the distribution of income, a more practical solution would be to first
reach a balanced budget when tax revenues are equal to government expenditures. To do
this the government might need to resort to using a contractionary fiscal policy, which
involves a decrease in government spending or an increase in taxes. However the
disadvantage of such policy is that it will worsen the existing recession in the UK as it
will cause aggregate demand curve to shift leftwards due to the decrease government and
consumer spending.

Works Cited
"David Cameron Pledges Tax Cuts 'for 30m People'" BBC News. N.p., 1 Oct. 2014. Web.
28 Oct. 2014.
Tragakes, Ellie. Economics for the IB Diploma. Cambridge. Print.