Equity in Distribution of Income

In a capitalist, market-based system, 100% equality of income is impossible, because income is based on corporations paying employees. and because corporations seek to maximise profits, they will always take home a larger share than any individual employee. This is normal. There are many more employees than there are of employers. Consequently, income distribution isn't largely unfair or anything. 

However, the concept of equity of income is also important. Equity is the concept of fairness, but not absolute equality. Equity can be implemented in many ways, such as taxation or welfare. 

Equity and Taxation

Types of Tax

Taxes are money paid by the population to the government. It is agreed by most people that people with higher incomes should pay more tax. There are three different ways to weight tax based upon income.

Progressive: A progressive tax is a tax where the marginal tax rate increases as net income increases. For example, the first 20,000$ you earn, you might only have to pay 10% of that income as tax. However, for the next 20,000$, you earn you may have to pay 15% of that as tax. This is considered by many as the most effective form of tax because the government can collect money without depriving poor people, but at the same time gathering large amounts from rich people. This means they can invest in public education and other things with reduced risk of crowding out. However, a negative this reduces the incentive for richer people to stay in the country. 

Proportional: A proportional tax is where the marginal tax rate doesn't change as net income increases. For example, the first 20,000$ you make, you will be taxed 15% of that money. The next 20,000$, you are also taxed 15% of that money. The issue with this is that the government has to decide on a tax rate that doesn't have a huge impact on lower incomes citizens but still collects enough money from higher-income citizens. The benefit of this is that higher-income earners are less likely to commit crimes like tax theft, and less likely to leave the country. 

Regressive:  A regressive tax is where the marginal tax rate decreases as net income increases. In most cases, high-income citizens will pay almost the same amount as low-income citizens. This type of tax is useful, however, it is rarely used as a form of direct tax. N

There are two different categories of taxes, direct taxes and indirect taxes.

Indirect taxes: Indirect taxes are taxes levied upon expenditure. For example, when you buy a cigarette in most countries, you have to pay the price of the cigarette, and you have to pay more in tax. This tax creates a loss of welfare, and both the consumers and producers have to pay the burden. Additionally, it is regressive, which means that those of lower-income are affected more than those of a high income. Therefore, most goods and services aren't taxed. Instead, direct taxes are used to prevent the overconsumption of demerit goods. 

Direct taxes: Direct taxes are taxes levied upon income. In (almost) every country, for every penny you make, you have to pay some amount of money to the government. This type of tax can be either progressive, proportional or regressive. 

How do these taxes create equity? 

The money collected by the government through taxes isn't (usually) kept by the government, but it is reinvested in the economy. It is spent on things that everyone benefits equally from, such as education and healthcare. Some of this money is spent (in most countries) in the military. It is also invested in the private sector, in order to stabilise the economy. In general investments in things like education and healthcare benefit lower-income citizens more, because they are less likely to have the money to invest in private education or medicine. Therefore, those of low income have more access to these things creating equity.

Since everyone benefits equally from these investments by the government, but higher-income earners (usually) pay more than lower-income earners, there is a redistribution of money from the rich to the poor, also creating equity. 

Measuring Equity of Income with the Gini coefficient

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