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Describes the distribution of income and trends in it over time. Sets out what proportions of the population have incomes at different levels, and which groups are found towards its top and bottom. Describes how income inequality has changed in recent decades, and how these trends contrast with those in other comparable countries, most of which have not experienced as sharp an increase as Britain. Also gives information about the distribution of wealth, and the way it has also become more unequally distributed in the most recent years. Finally, looks at public views of inequality in the UK, and at how these match or contrast with those in other countries.

Considers the persistence of financial poverty, measures of the poverty gap, and the extent to which those with low financial resources are suffering enforced deprivation. This latter section of the chapter discusses deprivation indicators, looking at their application in the context of the EU. The final section of the chapter turns to the broader issue of the overall distribution of income—measures of income inequality.

Household income and expenditure estimates from the Bureau of Economic Analysis measure aggregate and per capita averages, but provide no information on the distribution of income, crucial to measuring economic well-being. Micro estimates of household cash flow have information on income distribution and other household breakdowns, but are confined to cash income and direct household expenditures, and suffer from problems of non-reporting, underreporting, and underrepresentation of high-income households. Integrated estimates of household income and expenditures provide estimates of income distribution consistent with the more accurate and broadly-defined macro values, which include payments by employers and government for health care, and account for the effects of income taxes. Integrated estimates of household disposable income show a lesser degree of income inequality than do micro estimates from the Current Population Survey Annual Social and Economic Supplement, largely because of the inclusion of in-kind government social benefits that disproportionately benefit lower-income households, and of the exclusion from income of personal income taxes, disproportionately paid by high-income households. Changes between 2006 and 2010 show a narrowing in income discrepancies, reflecting declines in self-employment and property income of the top quintile and increases in government social benefits and lower taxes for the lowest quintile.

Chapter 1 introduces the basic ingredients of the optimal tax problem. The theory of optimal taxation begins by clarifying the objectives of policy and identifying the constraints upon policy. The tax system that best achieves objectives while satisfying constraints is identified as the optimum system. There are four main elements at play in determining the optimal income tax schedule in the Mirrlees model: the social welfare function; the distribution of earning abilities; the individual supply or behavioural response function; and the production structure. Together these four components produce a degree of optimal after-tax/transfer distribution. Hence, the optimal tax literature combines two rather different origins of economics: the ethics-related tradition and the engineering-related tradition. Chapter 1 provides an introduction to the topics covered in the book.

We begin seeking an answer to the question posed in Chapter 1 by using HMRC and ONS data to show the current range of incomes within the UK. Those in the bottom 5 per cent of the distribution have annual incomes of some £6,300, while those in the bottom 1 per cent have incomes below £3,500. We compare these numbers with those on the minimum wage who, if they work full time, have an income of £13,000 a year in 2014 prices. In the tax data the highest incomes are in the tens of millions. This chapter thus introduces the range of incomes within a country that we need to explain and introduces too the log normal distribution which will prove essential for understanding why we observe the range of incomes we do with large numbers of the poor and very few of the rich.

Demands on democracies include greater redistribution of economic resources. It is claimed that economic inequalities have grown very much, particularly since the 1980s. Yet ‘equality’ has been traditionally presented as the major difference between Left and Right. What are the specific features of a ‘social democratic’ conception of equality? Have party differences in egalitarian promises and outcomes vanished? This chapter examines the evolution of income inequalities from 1980 to 2010. Have changes in economic policies increased such inequalities? Are there still differences between Left and Right in the distribution of disposable incomes? And how strong is the capacity of social democracy to change the distribution of market incomes into a more egalitarian distribution of disposable incomes through public expenditure and taxation? What are the political consequences of egalitarian promises and social redistribution for parties of Left and Right?

The expansion of capitalism in the modern world has led to extended and heated debates both in favor of and opposed to this system of economic and political organization. This essay reviews several of the issues raised in these debates. On the favorable side it has been claimed that capitalism has led to rapid economic growth relative to the past, has reduced world poverty, and has meant decreases in warfare, famines, diseases, slavery, and environmental destruction. In contrast it has been charged with a worsening of the income distribution, a transfer of political power to the wealthy, environmental destruction, a deterioration in cultural life, and a general rise in unhappiness, Examples related to these arguments are provided, and the writings of major contributors discussed.

In this chapter we provide an overview of the arguments of the earlier chapters as to what explains absolute and relative poverty and the incomes of the super-rich. The factors that influence whether one is to be very poor or very rich are summarized in four steps: Step 1—Get lucky where you are born; Step 2—Get lucky when you are born (if unskilled you want the early twentieth century, if skilled after that); Step 3—Get lucky in being able to move (if born in the wrong place); Step 4—Get ultra-lucky with a great idea, or own an oil company, or have rich parents, or eliminate the competition.

This chapter is an essay on the ends and means of economic development. The objective of development is defined as the achievement of ‘rapid, inclusive, stable, and sustainable growth of national income, within a democratic political framework’. As regards the means to attain this objective, the fundamental choice concerns the balance between the state and the market in the organization of economic activity. The state may wish to intervene in markets to alter the distribution of income. It may also do so to correct ‘market failures’ caused, for example, by the presence of ‘external effects’. But the benefits of intervention have to be weighed against the costs of ‘government failure’, which may arise for several reasons, including in particular, the presence of ‘principal-agent problems’. The chapter also emphasizes the crucial distinction between the government paying for goods and services and the government producing and delivering goods and services.

This chapter looks at the work of Robert M. Solow, who was awarded the Nobel Prize in 1987. Solow was born in 1924 and recieved his B.A., M.A., and Ph.D.from Harvard University. He started out serving as assistant and associative professor of statistics. He was then appointed as professor of economics. He progressed to become institute professor and institute professor, emeritus, both at MIT. His doctorate thesis presented a model on the dynamics of the size distribution of incomes as the outcome of a random process of employment in terms of changes in wage levels. He also developed his own version of growth theory encompassing capital-theoretic overtones. Among his titles are Linear Programming and Economic Analysis and Monopolistic Competition and Macroeconomic Theory.