In response to increasing wealth and earnings inequality,
the idea of increasing tax rates for firm owners has both advantages and
disadvantages, as well as levying additional taxes on CEO bonuses versus taxing
their wealth directly. These responses can range in efficiency and fairness, as
some CEOs have incomplete contracts and government revenues being higher so
that there can be redistribution of income to support the lower income
An advantage of increasing tax rates for the richest is that
it would make more revenue available to the government. So, with the higher
government revenues from the tax, this would lead to less wealth and earning
inequality as there would be a redistribution of income, which is where there
is a direct or indirect transfer of income from the rich to the poor. This is
supported by the International Monetary Fund who found that “Higher income tax
rates for the rich would help reduce inequality.” (The Guardian,2017). The state
would now have the resources to provide lower income families with benefits
such as employment training and education, which would reduce inequality in
A disadvantage of this is it’s an increase in tax for all
firm owners, so it does not differentiate between firm owners who make more
money than other firm owners. Therefore, the taxes act as a disadvantage to
entrepreneurs as the taxes lower their overall net profit. This is supported by
the republican tax bill in the USA, where the SMA (Small Business Majority)
released a statement stating that, “this proposal would primarily help wealthy
individuals rather than small businesses.” (Inc, 2017) This is not fair,
as it would lead to smaller firm owners reducing their number of employees and
possibly relocating to a country which has lenient tax laws for firm owners,
which would take jobs away from a home country to abroad.
An advantage of levying additional taxes on CEO bonuses is
that when taxing CEOs, most of them have an incomplete contract. This is a
contract between an employer and employee, however the employer cannot specify
how hard the employee works, as it disregards the hours worked and quality of
work done. Therefore, a standard tax rate on all bonuses which CEOs would
receive would give a fairer and more efficient route of obtaining money for the
redistribution of income, whereas with a tax on their wealth it can be
distorted, as a farmer who owns land can be over taxed resulting in an income
which does not fully cover his needs. This has been shown in France where the
tax under François Hollande’s socialist government had been damaging farmers
and those on middle incomes (Telegraph,2014).
A disadvantage of levying additional taxes on CEO bonuses
rather than taxing their wealth directly is that when companies pay their
employees in bonuses it can be diversified, so that they are not only payed in
cash but in stock options. This was first done during the 1990s where companies
payed more in stock options and certain performance based bonuses, the annual
CEO compensation was $2.7million in 1989, however by 2016 this reached $13
million. This would result in a fall revenue created from the tax, however
limiting the compensation is unlikely for the CEOs as it is not longer
deductible as “the vast majority of those multimillion dollar packages are paid
in incentive based pay.” (Washington Post, 2017)
Q2: In the United
Kingdom, access to motorways is typically free with only limited exceptions.
However, they are provided as toll roads in many countries such as Italy
(Autostrade) and France (Autoroutes). Toll roads are frequently said to be a
typical example of club goods. Explain the advantages and disadvantages of toll
roads compared to toll-free roads by focussing on the nature of club goods
and/or public goods. In doing so, you should include the following issues,
congestion, investment and social benefits and costs.
Road space is a scarce resource meaning it’s a limited
resource but the demand of the good is unlimited, so it’s been argued that it should
be rationed by a price mechanism. This is where road users would pay to use the
road network, and make decisions between transport and other activities.
However, with the introduction of toll roads it has both advantages and
disadvantages when compared to toll free roads. A Toll road can be a public
good but can change between a private good and pubic good depending on the
amount of congestion.
One disadvantage of a toll road is the cost of implementing
and maintaining the system. This is exemplified by Germany where they have been
forced to make foreign cars pay up to 130 Euros a year to use the Autobahn
network, as the toll system will cost 200million Euros (Reuters,2014).
Therefore, this makes it difficult to make a profit from a toll road when
compared to a free road as the costs minimise the profit made from the toll.
Therefore, as the cost becomes higher than the profit it makes more sense to
use the money on state provided services such as education.
Another disadvantage is that we find in terms of
externalities, it presents a negative environmental externality. To solve this
by internalising the externality, road pricing is not seen as the best option.
This is because when profit is made, it should be reinvested into the toll road
to make this process more efficient rather than subsidising other traffic modes
or other state activities such as policing. Therefore, a more efficient
investment would be taxes on fuel or emission fees as they are more direct,
this has been shown by the diesel tax which drivers will face as the CO2
emissions are higher than newer cars, which helps to fund a £220 million clean
air fund (Mirror,2017).
An advantage of a toll road when compared to toll free roads
is that when toll roads are implemented it results in lower pollution. This is
because when they’re implemented vehicles travel at fuel efficient speeds,
where the speeds are between 45 and 60mph meaning that that less fuel would be
wasted while waiting in traffic, shown in the US to be $160 Billion (ABC News,
2015). This would further reduce the amount of traffic congestion and carbon
emission, shown by the marginal social cost being equal to the demand, rather
than the marginal private cost which the driver alone would bear, resulting in
a greater marginal social benefit resulting in an improvement in air quality.
Another advantage is the increase in safety for drivers on a
toll road. As cars travel at more efficient speeds this results in less traffic
and congestion, creating a safer environment for drivers. As the traffic is
free flowing, there’s a decrease in the amount of road deaths. This is shown by
road deaths decreasing by 2% compared with 2014, falling to 1732 (GOV, 2015).
This results in a greater marginal social benefit, which exemplifies how an
uncongested toll road is excludable but non-subtractable, making it a club
good. However, if the toll was congested it would become a private good because
it’s excludable and subtractable, as each car on the road reduces the space
available for other cars. Which results in an increase in aggravation, causing