Explain how income inequality might be measured in a country.

Evaluate the view that the best way to reduce income inequality in a country is by using progressive taxation.

Answers may include:

• definition of income inequality
• diagram to show a Lorenz curve and how the Gini co-efficient is derived
• explanation of the methods used to measure income inequality: Lorenz curve, Gini co-efficient
• examples of countries with income inequality.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of progressive taxation, income inequality
• diagram to show how progressive taxation could decrease income inequality (inward shift of the Lorenz Curve), or a progressive tax diagram
• explanation of how progressive taxation reduces the disposable income gap between people of lower and higher incomes
• examples of where or how progressive taxation has been used
• synthesis or evaluation.

Evaluation may include: the impact of progressive taxation in reducing income inequality including:
tax avoidance/tax evasion; disincentive effects; effects on efficiency; consideration of alternative approaches such as government spending on merit goods/transfer payments, minimum wage, consideration of `best’.

NB If only progressive taxation is considered, with explanation and evaluation of its impact, but no alternative policy is considered, a maximum of mid-Level 3 should be awarded, as the question would not have been fully answered in terms of `best way’.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.