3.6.4 Redistribution of Income and Wealth — Practice Questions

Seven original multiple-choice questions on redistributing income and wealth: the difference between income and wealth, progressive, proportional and regressive taxes, incentives and the poverty trap, and the provision of services. Two are calculations.

7 questions Edexcel B A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 3.6.4 Redistribution of Income and Wealth revision notes.

1. 1. Table 1 shows the finances of one household.
   Using Table 1, the household's wealth is

   Calculation

   Table 1: One household's finances

   Item	Value
   House	£280,000
   Mortgage still to repay on the house	£190,000
   Savings in the bank	£12,000
   Car loan still to repay	£8,000
   Pay received over the past year, after tax	£36,000

   Select one answer

   A £94,000

   B £102,000

   C £130,000

   D £292,000
   Show model answer

   Answer: A (£94,000). Wealth is the stock of assets a household owns at a point in time, minus any debts. Pay is income, a flow over a period, so it is left out.
   Assets: house £280,000 + savings £12,000 = £292,000.
   Debts: mortgage £190,000 + car loan £8,000 = £198,000.
   Wealth: £292,000 − £198,000 = £94,000.

   Why the other options are wrong

   • B — This subtracts the mortgage but not the car loan: £292,000 − £190,000 = £102,000. Every debt is taken off, so the £8,000 car loan has to go as well.
   • C — This adds the year's pay to wealth: £94,000 + £36,000 = £130,000. Pay is income, a flow over a period. Only the part of it that has been saved, and is already in the £12,000 of savings, counts as wealth.
   • D — £292,000 is the value of the assets alone. Wealth is assets minus debts, and the household still owes £198,000 on its mortgage and car loan.

2. 2. A supermarket offers a part-time worker an extra £150 a week of shifts. The worker receives a means-tested benefit. Income tax and National Insurance take 28% of the extra pay, and the benefit falls by 55p for every £1 of extra pay left after tax.
   To the nearest whole per cent, the worker's effective tax rate on the extra £150 is

   Calculation

   Select one answer

   A 32%

   B 55%

   C 68%

   D 83%
   Show model answer

   Answer: C (68%). Tax and National Insurance: 28% × £150 = £42.
   Pay after tax: £150 − £42 = £108.
   Benefit lost: 55% × £108 = £59.40.
   The worker keeps £108 − £59.40 = £48.60 of the extra £150.
   Effective tax rate: (£150 − £48.60) ÷ £150 × 100 = £101.40 ÷ £150 × 100 = 67.6%, or 68% to the nearest whole per cent.
   This is the poverty trap: the worker loses more than two-thirds of the extra pay, so turning down the shifts may make sense. For the supermarket, that makes the extra hours harder to fill.

   Why the other options are wrong

   • A — 32% is the share of the extra £150 the worker keeps: £48.60 ÷ £150. The effective tax rate is the share they lose, 100% − 32% = 68%.
   • B — 55% is the rate at which the benefit is withdrawn. It leaves out the 28% taken in tax and National Insurance, which comes off first.
   • D — This adds the two rates, 28% + 55%. But the benefit falls by 55p for each £1 left after tax, so the 55% applies to £108, not to the full £150.

3. 3. Table 1 shows how much of two taxes three households pay in a year.
   Using Table 1, Tax X and Tax Y respectively are best described as

   Data interpretation

   Table 1: Tax paid by three households in a year

   Household income	Tax X paid	Tax Y paid
   £15,000	£1,500	£1,200
   £40,000	£4,000	£2,000
   £100,000	£10,000	£3,000

   Select one answer

   A Progressive and progressive.

   B Progressive and regressive.

   C Proportional and progressive.

   D Proportional and regressive.
   Show model answer

   Answer: D (Proportional and regressive.). Taxes are classified by how the share of income paid in tax changes as income rises, not by the amount paid.
   Tax X: £1,500 ÷ £15,000 = 10%; £4,000 ÷ £40,000 = 10%; £10,000 ÷ £100,000 = 10%. The share stays the same → proportional.
   Tax Y: £1,200 ÷ £15,000 = 8%; £2,000 ÷ £40,000 = 5%; £3,000 ÷ £100,000 = 3%. The share falls as income rises → regressive, even though richer households pay more in pounds.

   Why the other options are wrong

   • A — This judges both taxes by the amount paid, which rises with income for each. Tax X takes 10% of every income, so it is proportional, and Tax Y takes a falling share, so it is regressive.
   • B — Tax Y is regressive, but Tax X takes exactly 10% of every income. A tax is progressive only if the share rises with income, so X is proportional.
   • C — Tax X is proportional, but Tax Y is not progressive just because richer households pay more pounds. Its share of income falls from 8% to 3%, so it is regressive.

4. 4. A government cuts the rate at which a means-tested benefit is withdrawn, from 60p to 45p for every £1 earned. Tax rates are unchanged.
   The most likely cost of this change is

   Applied reasoning

   Select one answer

   A A rise in relative poverty, as low earners lose benefit faster.

   B A stronger poverty trap, as low earners keep less of each extra £1.

   C Higher benefit spending, as better-off households now qualify too.

   D Lower income tax revenue, as low earners pay a lower tax rate.
   Show model answer

   Answer: C (Higher benefit spending, as better-off households now qualify too.). Withdrawing the benefit more slowly weakens the poverty trap: a low earner now loses 45p rather than 60p of benefit for each extra £1, so working more pays better.
   The cost: the benefit now runs out at a higher income → households further up the income scale still receive some of it → benefit spending rises.
   That is the trade-off between equity and incentives: a smaller poverty trap costs more.

   Why the other options are wrong

   • A — Low earners now lose benefit more slowly, not faster. They keep more of their income, so relative poverty is more likely to fall than rise.
   • B — This is the wrong way round. A low earner now keeps more of each extra £1, because only 45p of benefit is lost rather than 60p. The poverty trap is weaker.
   • D — Tax rates are unchanged. The change is to the benefit, so it raises spending rather than cutting tax revenue.

5. 5. Over five years, house prices in a country rise by 30%. Wages, rents and benefits do not change. Most homes are owned by better-off households, and poorer households mostly rent.
   The most likely effect is that

   Applied reasoning

   Select one answer

   A Income and wealth inequality both widen.

   B Income inequality is unchanged, and wealth inequality widens.

   C Income inequality widens, and wealth inequality is unchanged.

   D Neither changes, as no household's income has changed.
   Show model answer

   Answer: B (Income inequality is unchanged, and wealth inequality widens.). Income is a flow of money over a period. Wealth is the stock of assets owned at a point in time, such as a house.
   Wages, rents and benefits are unchanged → nobody's income changes → income inequality is unchanged.
   House prices rise by 30% → homeowners' assets are worth more → they become wealthier. Homeowners are mostly better off, and poorer households mostly rent → wealth inequality widens.

   Why the other options are wrong

   • A — A rise in house prices makes homeowners wealthier, but it does not change anyone's income. Wages, rents and benefits are all unchanged, so income inequality stays the same.
   • C — This is the wrong way round. Nobody's income has changed, while the value of the houses owned mostly by better-off households has risen by 30%.
   • D — Income has not changed, but wealth has. Inequality of wealth is measured separately from inequality of income, and the two can move differently.

6. 6. A study finds that children from high-income families are twice as likely as children from low-income families to attend their area's best state schools. Homes near those schools cost far more than homes elsewhere.
   This suggests that free state schooling

   Applied reasoning

   Select one answer

   A Does less to narrow the gap, as richer families get the best places.

   B Has no effect on inequality, as it is paid for from taxes.

   C Narrows the gap fully, as every child is offered the same free place.

   D Redistributes wealth, not income, as homes near the schools cost more.
   Show model answer

   Answer: A (Does less to narrow the gap, as richer families get the best places.). Free schooling redistributes because a school place is worth far more compared with a low income than a high one, and because it lets children's skills depend less on their parents' income.
   How much it redistributes depends on quality and access. Better-off families can afford homes near the best schools → they get more of the best places → the service does not reach everyone equally → it narrows the gap less than it would if every child had the same chance of a good school.

   Why the other options are wrong

   • B — Being paid for from taxes does not stop a service redistributing. Taxes are paid mostly by better-off households, and free schooling is worth far more compared with a low income than a high one.
   • C — Every child is offered a free place, but not an equally good one. The study shows richer families get more of the best places, so the gap is not fully closed.
   • D — The house prices explain how richer families get the best places. They do not change what the schooling does, which is to raise children's skills and so their future incomes.

7. 7. A landlord sells a second flat for £90,000 more than it cost eight years earlier. The government taxes part of that £90,000 profit.
   The tax is

   Definition in context

   Select one answer

   A Capital gains tax, aimed at wealth.

   B Income tax, aimed at the landlord's income.

   C Inheritance tax, aimed at wealth.

   D VAT, a tax on spending.
   Show model answer

   Answer: A (Capital gains tax, aimed at wealth.). Capital gains tax is a tax on the profit from selling an asset, such as shares or a second home.
   The landlord has sold a flat for £90,000 more than it cost → that profit is a capital gain → capital gains tax. It is one of the two main taxes aimed at wealth, alongside inheritance tax.

   Why the other options are wrong

   • B — Income tax would apply to the rent the landlord received while letting the flat. The £90,000 is a profit from selling the flat itself, which is a capital gain.
   • C — Inheritance tax is charged on large estates when someone dies. Here the landlord is alive and has sold the flat.
   • D — VAT is a tax on spending on goods and services. The landlord is selling an asset at a profit, not buying something.