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Understanding economic inequality
Understanding economic inequality

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6.1 Redistribution of incomes through the taxation and benefit system

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Figure 20 The taxation and benefit system can reduce inequality.

If the distribution of incomes in the economy is considered to be unequal in a way that is unfair, the government may use its taxation and spending policies to redistribute incomes to achieve a more equal distribution of incomes.

The government can use a more progressive tax system to redistribute incomes, whereby those on higher incomes pay increased tax rates and those on lower incomes face lower tax rates. This has the effect of transferring part of the higher incomes towards lower income earners.

The government can also increase the income of low income households directly though the payment of social benefits such as the Jobseekers Allowance or Universal Credit.