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Home > Wednesday Wisdoms: Newsletter > Does Increasing Taxes for the wealthy really bring down Inequality?

Welcome to the 9th edition of Wednesday Wisdoms by EdGenie!

Every Wednesday I send out actionable tips, tricks and real-world application insights from my 13-year experience coaching students to achieve As and A* in their Economics and Business A Levels.

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Critical Analysis of three potential strategies to address wealth inequality in the UK
​UK’s biggest pub group to charge 20p more a pint at busy times under surge pricing
Infographic of the Week
Chart of the Week
Macroeconomic Data

Bridging the Wealth Gap: A Closer Look at Proposed Policies and Alternative Strategies❓

Hey Genies, 🌟
In a recent video (can see it here), New Statesman's Harry Lambert highlighted three potential strategies to address wealth inequality in the UK. Before we delve into alternative solutions, let's scrutinise these suggestions with a more nuanced lens:

A Critical Analysis of the Proposed Strategies

1. Thus, this proposal could serve to redistribute wealth, alleviating the burden on lower-income homeowners, BUT an extra £8,000 on their home means absolutely nothing to them so actually won't even touch upon their wealth.

  • Burnley (a generally lower-income area): Currently, homeowners pay around 1% of their home value in council tax. Assuming an average home value of £100,000, residents would be paying £1,000 annually. With the proposed reform, this amount would decrease to £500, easing the financial burden on these homeowners.
  • Kensington and Chelsea (a wealthy area): Given the average home value is significantly higher, say £2,000,000, residents currently pay around £2,000 in council tax annually. Implementing a 0.5% rate would increase this to £10,000, meaning wealthier homeowners contribute more to the public coffers.

2. Tax on Investment Income​
Applying a national insurance charge on rental income is another proposition, aiming to increase the tax burden on property investments. While this could pull some resources from wealthier citizens, it might deter investments, a critical driver of economic growth, and potentially not having a substantial impact on the wealthiest who have diverse income avenues.

3. Changing Capital Gains Tax​
Increasing the capital gains tax rate, perhaps to 28%, is seen as a lucrative revenue stream for the treasury. However, this method might primarily impact middle-class investors who rely on investment gains for wealth accumulation via their pension funds. Without complementing wealth redistribution strategies, its effectiveness in reducing wealth inequality remains questionable.

Towards More Sustainable Solutions: Three Supply-Side Policies

Addressing wealth inequality is a multifaceted issue, and the notion of simply taxing the rich more heavily can sometimes fall short of achieving the desired equalisation.
In some cases, increasing tax rates on the wealthy might encourage tax evasion and capital flight, where wealth is moved to jurisdictions with more favourable tax conditions, potentially exacerbating wealth inequality within the taxing jurisdiction.
As we ponder on the implications of these strategies, let's also consider alternative supply-side policies that could be more effective in bridging the wealth gap:

1. Education and Skills Training​
Investing in education and skills training can be a sustainable approach to reducing wealth inequality. This policy fosters a level playing field where everyone has an opportunity for financial upliftment through securing better-paying jobs and reducing reliance on welfare schemes.

2. Promoting Entrepreneurship and Small Businesses​
Encouraging entrepreneurship can be a potent strategy to tackle wealth inequality. Through providing incentives and support to startups and small businesses, we can foster a more inclusive economy, creating new job opportunities and facilitating wealth distribution as more individuals have the opportunity to become business owners and wealth creators.

3. Enhancing Infrastructure and Connectivity​
Infrastructure development and enhanced connectivity can bridge the wealth gap to an extent. By fostering business growth and creating job opportunities in underdeveloped areas, we promote economic activities and opportunities in regions that are usually left behind, fostering a more equitable distribution of wealth.

Conclusion

While the strategies proposed in the video have their merits, they are very short-term and only consider raising funds for the government. Focusing on supply-side policies that foster education, entrepreneurship, and infrastructure could potentially offer a more sustainable solution to reducing wealth inequality. These strategies aim not only to redistribute wealth but also to create opportunities for wealth generation across all segments of society, fostering a more inclusive economic landscape.

​UK’s biggest pub group to charge 20p more a pint at busy times under surge pricing

Summary

  • Stonegate Group, Britain's largest pub group, will introduce "dynamic pricing", charging an additional 20p for a pint of beer during peak times.
  • This group owns chains like Slug & Lettuce and Yates’s.
  • The price rise is set for 800 of its venues, especially during weekends, to address increasing costs.
  • This approach was previously applied during special events like the World Cup but will now be a regular feature.
  • Customers were informed via a "polite notice" in Stonegate pubs. The increase covers expenses like additional staff, more door security, cleaning, and compliance with licensing requirements.
  • Dynamic or surge pricing is familiar in other sectors, such as aviation and services like Uber. It's also common in US sports or gig ticketing but rarer in the UK.
  • Some fans of Bruce Springsteen expressed disappointment when he applied dynamic pricing to tickets for his tour.
  • Stonegate's spokesperson commented on their continuous review of pricing, emphasising promotions and the occasional need for price increases due to rising operational costs.
  • An anonymous chief executive from another major UK pub chain said this practice isn't new, noting it has been "going on for decades" during events and peak times.
  • The same executive applauded Stonegate for their transparency but also pointed out that it might have led to backlash on social media and negative press.

A Level Economics Questions:

Q: How does the concept of elasticity of demand play a role in Stonegate Group's decision to implement dynamic pricing during peak times?
A: Elasticity of demand measures how the quantity demanded of a good responds to changes in its price. Stonegate Group likely anticipates that the demand for their products (beer) is inelastic during peak times, meaning consumers will not significantly reduce their consumption in response to a small price rise. The decision to implement dynamic pricing during busy periods suggests they expect total revenue to increase despite a potential slight decrease in quantity demanded.

Q: Why might businesses like Stonegate Group consider employing dynamic pricing rather than increasing prices uniformly across all times?
A: Dynamic pricing allows businesses to capitalise on periods of high demand, extracting more consumer surplus during times when customers are more willing to pay. A uniform price increase might deter customers during non-peak times when demand is more elastic. By employing dynamic pricing, Stonegate Group can maximise its revenue during peak times without negatively affecting its sales during off-peak times.

Q: Discuss the role of externalities in the context of Stonegate Group's decision to increase prices due to additional costs, such as more bouncers at the door and extra cleaning.
A: Externalities refer to the external costs or benefits to third parties not involved in a transaction. In this context, the provision of more bouncers and extra cleaning can be seen as positive externalities as they contribute to a safer and cleaner environment, benefiting not just the pub-goers but also the wider community. However, Stonegate Group is internalising these external costs by adjusting its prices, ensuring that the beneficiaries (the customers) share in covering the costs of these benefits.

Q: Based on the article, how might consumer perceptions and behaviours influence the outcomes of dynamic pricing strategies?
A: Consumer perceptions play a crucial role in the success of pricing strategies. If consumers perceive the dynamic pricing as fair and justified due to increased service quality or enhanced experience, they might be more willing to pay the higher price. However, if they view it as opportunistic or exploitative, it can lead to negative publicity and potential loss of customers. As highlighted, the transparency of Stonegate Group resulted in mixed reactions, emphasising the importance of managing consumer perceptions when implementing such strategies.

Possible A Level Economics 25 Marker Question

Evaluate the effectiveness of employing dynamic pricing as a strategy in sectors such as the pub industry, using Stonegate Group's decision as a reference point.

Infographic of the Week

Can People Survive Without Income?

In a 2021 survey sponsored by Lloyd’s Register Foundation, 125,000 people from 121 countries were polled about their financial resilience, revealing stark disparities between developed and developing economies. Notably, countries like Sweden, Hong Kong, and Norway had the majority of their populations able to sustain themselves for over a month without income. In contrast, countries such as Bangladesh, Egypt, and Jordan had a significant number struggling to meet basic needs after just a week without income. Alarmingly, globally, 2.7 billion people could cover their basic needs for only a month or less without an income, with 946 million of them surviving just a week, highlighting the urgent need for measures to bolster financial security, especially amidst global challenges like climate change and pandemics.

Chart of the Week

Decline in Smoking

The Office for National Statistics (ONS) reports a significant decrease in adult smoking habits in the UK over the past decade, with the proportion of smokers declining from 20.2% in 2011 to 12.9% in 2022. This reduction is observed across all age groups, with men and women's smoking rates dropping from 22.4% and 18.2% respectively in 2011 to 14.6% and 11.2% in 2022. Conversely, vaping has seen an uptick, particularly among younger age groups, with daily or occasional e-cigarette use rising from 6.4% in 2020 to 8.7% in 2022. Despite a 70% increase in tobacco duty rates from 2011 to 2022, tobacco duty revenue fell from £9.9bn in 2011/12 to £9.4bn in 2022/23, marking a 5% cash and 26% real-term decline.

Macroeconomic Data

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