Examine the causes of income and wealth inequality in the UK or any countryof your choice. (20 Marks)Mark SchemeCauses could include:• Education• Skills and training• Experience/age• Type of employment• Ownership of assets• Inheritance• Pension rightsEvaluation:• Prioritisation of factors• Significance of each factor• Level and quality of education e.g. degree, subject, class• Pension rights e.g. final salary schemes• ConclusionIn the 2009 budget the UK government announced that a new 50% rate ofincome tax would be introduced in 2010. This creates three marginal taxrates of 20%, 40% and 50%, instead of two. Evaluate the likely economiceffects of this change in the tax structure. (30 Marks)Mark SchemeEffects include:• Disincentive to work: could be analysed using income and substitution effects• Tax revenues- use of Laffer curve analysis• Tax evasion (illegal)• Tax avoidance (legal) e.g. working fewer hours taking income in form of share option(CGT only 18%)• Tax exiles – move to Switzerland• Distribution of income – more even: analysis of progressive taxation• Impact on AD and associated analysis
Evaluation could include:• Extent of disincentive effects of 50% tax rate• Ease of avoiding 50% tax rate• Number of people affected by new tax rate• Extent of tax evasion• Significance of impact on different sectors of the economy e.g. on financial services• Impact on income distribution might be offset be other factors e.g. increasingunemploymentExaminers ReportThis was the least popular of the three essay questions and responses were generally weakerthan on the other essays.Better answers to part (a) were able to examine some valid causes of inequality such asinheritance, education, pension rights and ownership of assets. However, others struggled todevelop more than one point or wrote generalised answers relating to wages.Answers to part (b) were more convincing with some discussion of the possible impact on taxrevenues, disincentives and the effect on aggregate demand. However, evaluation was oftensurprisingly weak, given the topical nature of this question.