1. Beginning activity - start with the opening question on tax evasion and take 5 minutes to discuss the implications of this.

2. Processes - technical vocabulary - students can learn the content watching the videos, reading the key terms and then completing each of  the activities on this page. 

3. Applying the theory - activity 2 and 3 focuses on the effectiveness of the role of taxation on income distribution.  (10 minutes)

4. More application of theory - activity 4 and 5 are HL only activities and require students to use the theory to calculate the tax paid by different income earners.  (15 minutes)

5. Developing the theory - activity 6 and 7 begins the second part of this lesson, on the issue of fairness. Just because progressive tax systems place a larger burden on the rich does this really make them fairer?  What are strengths and weaknesses of progressive tax systems.  Activity 6 is best completed as a class discussion rather than completed individually.  (15 minutes)

6. Applying the theory - activity 8 develops this argument further and considers the difficulties governments face in trying to raise further taxes on the wealthiest individuals and corporations in a global world.  (15 minutes)

7. TOK exercise - activity 9, should we be able to choose how are taxes are spent? (10 minutes)

8. Reinforcement exercises - activity 10

9. Reflection activity -  contains an example of a paper one type question, which you can either print off or project onto the whiteboard.  Allocate 10 minutes for this activity.

Responses should include the following:

A definition of a free market system and income distribution. 

An explanation of why free market economic systems may be less equal in terms of income distribution.

A recognition that in free markets that all factors of production are controlled and owned by private individuals, the low progressive tax rates (the burden of which falls primarily on high earners) present in free market economic systems as well as an absence of transfer and other welfare payments.  The recipients of transfer and other welfare payments are more likely to be low income households.

A suitable diagram such as a Lorenz curve, showing a less equal distribution of income in market economic systems, such as the USA, compared to a more mixed economic system such as Germany.  For example on the diagram the poorest 20% of the population in USA own collectively less than the lowest 20% of earners in Germany.

A recognition that income inequality is measured by the gini co-efficient.  We would expect to see a higher gini co-efficient within free market economic systems.

Responses should conclude with a comparison of economies with a high gini co-efficient such as USA and a low co-efficient, e.g. Germany.

Command term: Evaluate

In this example the command term evaluate requires candidates to make a judgement on the validity of the above statement.  Responses should also include an overall conclusion, based on the evidence submitted.

A relevant real world example might include a comparison of the efficiency of largely free market economies, such as Hong Kong or USA with nations that implement extensive government policies aimed at reducing income inequality e.g. many EU nations.

Responses should include the following in their response:

A definition of income equality and economic efficiency.

A discussion of different policies which may be employed to reduce income inequality levels.  Examples include a greater use of progressive taxes and transfer payments.  Governments can reduce income inequality by increasing progressive taxes, the burden of which falls primarily on high income households, as well as increasing government spending on transfer payments.  Dealing with high taxes first, particularly progressive taxes such as income or corporation tax, economic theory dictates that raising the rate of income tax will be effective in reducing income inequality, but it may not be effective in improving economic welfare.  The Laffer curve on the right illustrates the relationship between the % rate of income tax and the level of tax revenue collected.  As governments have discovered to their cost in the past, once the level of tax rises past its optimum point, tax revenue will fall as individuals will simply work less, reducing the effectiveness of any income inequality reduction policy.

Similarly, while increasing the level of transfer payments e.g. public sector wages, pensions, sickness payments and out of work benefits, is likely to improve income equality, with the recipients of such payments more likely to be from low income households, the policy may also provide a disincentive to work.  This is because some recipients may simply choose to collect benefits, rather than looking for employment.

In other words policies which are effective in reducing income equality may also reduce economic efficiency by providing a disincentive to work or set up a business as the burden of progressive taxes will always fall heaviest on those who benefit from working hard to increase their disposable income.

This is illustrated by the next two diagrams diagrams.  The first on the left, illustrates the Lorenz curve for two different nations.  The red line represents Germany, which implements a range of policies aimed at poverty and income inequality reduction, including a rise in progressive taxes and transfer payments.  The green line represents the USA which does not – leaving this up to the free market.  Unsurprisingly Germany experiences lower levels of inequality, represented by a smaller Gini coefficient, but as a consequence may experience from a loss of efficiency.

The second diagram, to the right, illustrates this, illustrating a production possibility frontier, with point A drawn on the edge of the PPF curve and representing an economy running efficiently and point B lying within the boundary of the PPF.  The loss of economic efficiency, resulting from a rise in progressive taxes and transfer payments, is represented by a move from point A to point B on the diagram.

The mark bands for using a real world example can be accessed by providing examples of where such policies have been used. This might include, for instance, a comparison of two countries such as Sweden and USA.  Alternatively responses might include an example of where a government has implemented poverty reduction policies and seen a fall in inequality as a result.

The essay should finish with an evaluation on the impact of income equality policies on a range of different stakeholders.  Relevant stakeholders might include entrepreneurs, low paid workers, high paid workers as well as the recipients of social benefit payments.