Question

Use the following news clip to work Problems 20 and 21 David Cameron Promises \(£ 7.2\) Billion Tax Cuts to the Rich David Cameron has handed the rich a massive tax break while clobbering the poorest with more spending cuts. The Prime Minister promised \(£ 7.2\) billion of tax cuts for the well-off, leaving them \(£ 1,900\) a year better off. And the cash will come from \(£ 25\) billion slashed from town halls, education, police, welfare and other vital services. While a worker on \(£ 12,500\) would save \(£ 500\) a year, someone earning \(£ 50,000\) would keep \(£ 1,900\) extra. Source: Mirror, October 1,2014 Explain why tax cuts in a progressive income tax system are consistently criticized for favoring the wealthy.

Short answer

Tax cuts in a progressive system favor the wealthy because they lead to larger absolute savings for higher-income earners, increasing income inequality and often reducing funding for essential public services.

Step-by-step solution

Understanding Progressive Income Tax

A progressive income tax system is one where the tax rate increases as the taxpayer's income increases. This means that higher-income earners pay a larger percentage of their income in taxes compared to lower-income earners.

Analyzing the News Clip

The news clip mentions that the Prime Minister promised £7.2 billion in tax cuts for the wealthy, which would leave them £1,900 better off annually. In contrast, a worker earning £12,500 would save only £500 a year.

Explaining the Criticism

In a progressive tax system, any tax cuts often result in larger absolute savings for higher-income individuals. This is because they are paying more in taxes to begin with. Therefore, a proportional tax cut results in them saving more money compared to those with lower incomes. Consequently, tax cuts for the wealthy are criticized because they increase the disparity between the wealthy and the poor, as the wealthy benefit more significantly.

Impact on Public Services

The news clip also mentions that these tax cuts are funded by slashing £25 billion from essential services like town halls, education, police, welfare, and other vital services. This means that the poorest, who rely more on these services, are adversely affected, thereby widening the income inequality gap.

Key concepts

Progressive Tax System

A progressive tax system is one where the tax rate increases as the taxpayer's income increases. This means that individuals who earn more pay a higher percentage of their income in taxes compared to those who earn less. It is designed to be equitable, with the goal of reducing income inequality.

• The more you earn, the higher the tax rate you pay.
• It aims to ensure those with greater financial capacity contribute more to funding public services.

By nature, this system seeks to address imbalances by taxing higher incomes at progressively higher rates, which can be crucial for supporting public goods and services that benefit society as a whole.

Income Inequality

Income inequality refers to the uneven distribution of income within a population. In situations where the wealthy receive significant tax breaks, income inequality can worsen.

• Tax cuts for the rich mean they have even more disposable income.
• The gap between the rich and the poor widens further.

Critics argue that in a progressive tax system, tax cuts should be used to achieve more balanced income distribution, benefiting lower-income groups who need the relief most. Otherwise, the rich get richer, and the poor struggle even more.

Public Services Funding

Public services include essential services like education, healthcare, police, and welfare programs. These services are typically funded through taxes collected by the government.

• When tax revenue decreases due to cuts, funding for these services can diminish.
• This can particularly impact low-income households who rely more on public services.

This makes it challenging for governments to sustain quality public services, potentially leading to higher economic disparities and greater societal issues.

Economic Disparity

Economic disparity refers to the differences in income and wealth between various segments of the population. Progressive income tax cuts favoring the wealthy can exacerbate these disparities.

• Wealthy individuals gain more from tax cuts, increasing their financial advantage.
• Lower-income individuals suffer from reduced public services, adding to their financial burdens.

This can result in a cycle where the poor have fewer opportunities to improve their situation, whereas the rich continue to accumulate wealth, leading to long-term economic imbalance and social tension.