Income inequality is increasing over the last 40 years. One of the simplest ways to measure income inequality is to look at the share of income, which is being received by the highest paid income persons. Due to the increasing rate of income inequality, this is becoming one of the hottest debate topics of the present time, specifically since the time of economic downturn. Moreover, the latest evidence is suggesting that the rise in income inequality can be associated with lower growth of the economy, and this is making it a significant issue to consider by policymakers.

Effects of Taxes on income inequality

Reducing inequalities and increasing equity are two of the most important things to consider for every economic objective. It is easy to understand the fact that the more progressive taxes have the ability to change income inequality if they can’t change anything else. While federal taxes are more progressive in this regard as compared to the sales or other individual tax systems.

The tax system of the UK is perfectly progressive, which is helping the government to redistribute the income. Well, this is because:

• Individuals who have an income lower than £10,000 are being considered as Tax-free. Because people with this range of income will not pay any income tax.
• Moreover, earners have to pay tax at a basic rate of 20%.
• People with higher incomes than a certain level will pay 40% income tax.

These are the most effective tax bands which can be helpful in narrowing the income gap and can help to reduce inequality in an effective way.

Role of policymakers

Policy makers at the present time are working hard to manage equity and to reduce income inequality in the best possible way by making effective tax systems. This truly means the implementation of better progressive tax systems which takes more income from the people with more income or higher wages and will be used in to redistribute for the welfare of the people who have lower income.

In recent years EITC has proved positive benefits of taxes on income inequality. The increase in EITC is helping plenty of children to pull out of the poverty lines annually. Furthermore, this is providing more support to poor people and enhancing their chances of earning in the best possible way.

Final words

The rapid growth of emerging economies in the previous time has lifted plenty of people out of absolute poverty and has reduced the disparities of income all across the world. Well, the tax is being considered as one of the best factors which can influence the distribution of income system and can bring positive results in the process of reducing income inequalities. It is because the game is quite simple; the people with high incomes will pay more amount as tax as compared to the ones who have low income. Making the tax code more ironic can help the governments to deal with the issue of income inequalities in a much better way.