3.7.3 - Government Policies to Alleviate Poverty and to Influence the Distribution of Income and Wealth

Question 1

How can poverty increase in a country?

Answer 1

Cuts in welfare benefits
Fiscal Drag
Taxation
Benefits System

Question 2

How can poverty be undermined?

Answer 2

Steeper progressive taxation.
Increase welfare benefits.

This reduces inequalities in the distribution of income (in the short-run, at least).

Question 3

What do pro free-market economists feel about progressive taxation?

Answer 3

It actually worsens labour market incentives, competitiveness and economic growth.

Culture of welfare dependancy - people become long-term unemployed and reluctant to look for work.

This is a government failure as low incomes may fail to increase and therefore poverty may increase.

Question 4

How can government welfare benefits be divided?

Answer 4

Means tested benefits vs. universal benefits.

Question 5

What is an example of a universal benefit?

Answer 5

The 2018 Winter Fuel payment between £100 and £300 for any pensioners regardless of income.

Removal of tax on Winter Fuel that year.

Question 6

Why has the UK government tried to move away from universal benefits?

Answer 6

A move towards means-tested benefits are desired as universal benefits are usually expensive to provide and go to those who do not need them.

Question 7

Why has the UK government tried to move away from universal benefits?

Answer 7

A move towards means-tested benefits are desired as universal benefits are usually expensive to provide and go to those who do not need them.

Question 8

Why do some universal benefits have some benefit? (haha see what I did there?)

Answer 8

Universitality means everyone gets it.

Means-tested benefits mean that you need to fill out many forms to prove low income or high child number etc. which may put people off.
Some people, particularly old pensioners may be too proud.

Question 9

What detractors do means-tested benefits have?

Answer 9

There can be unintended disincentive effects which prevent the low-waged from working harder and the unwaged from seeking employment.

Question 10

What is a household?

Answer 10

A group of people who are living together in a house / flat.

Question 11

In 2016/17, what was the amplification of bottom fifth incomes to top fifth incomes prior to taxation and cash benefits?

Answer 11

12x more.

£88,800 to £7,400.

Question 12

In 2016/17, what was the amplification of bottom fifth incomes to top fifth incomes after taxation and cash benefits?

Answer 12

£13,400 compared to £70,700.

Question 13

What were the ratios of income from richest fifth to poorest fifth in 2016/17 before and after taxation?

Answer 13

12 to 1 (pre-tax)
5 to 1 (post-tax)

Question 14

What were the ratios of income from richest fifth to poorest fifth in 2016/17 before and after taxation?

Answer 14

12 to 1 (pre-tax)
5 to 1 (post-tax)

Question 15

What are the five stages that demonstrate how taxation and cash benefits affect income?

Answer 15

1. Household members gain money from employment, private pensions or investments. (Original Income)
2. Households then receive income from cash benefits. The sum of cash benefits and original income is referred to as ‘gross income’.
3. Households then pay direct taxes. Income after direct taxes have been deducted from ‘gross income’ is known as ‘disposable income’.
4. Indirect taxation is then paid on spending on goods and services. (Post-tax income)
5. Households then receive a benefit from services provided by the government. (Final income)

Question 16

What is fiscal drag?

Answer 16

When the government fails to raise tax thresholds in line with inflation.

Question 17

Why is fiscal drag a problem?

Answer 17

Due to inflation, actual buying power of income does not increase so the real income remains unchanged, but the inflation has caused people to be dragged into a different tax bracket making them worse off in real terms.

Question 18

What is the marginal tax rate?

Answer 18

The tax rate levied on the last pound of income received.

Question 19

How have UK governments recently tried to reduce relative poverty?

Answer 19

Income tax brackets have been raised by more than the rate of inflation.

Question 20

Why does the government need to think very carefully about increasing tax brackets?

Answer 20

Increasing tax brackets mean they lose out on income. If they need to pay for costly public services, tax brackets may need to remain fixed causing fiscal drag to pay for those things.

Question 21

What is the earnings trap?

Answer 21

The low-waged people in employment rather than the unemployed who are unwaged keeps people in poverty.

Question 22

Who is affected by fiscal drag?

Answer 22

The workers who are above the floor of income tax but below the ceiling of means-tested benefits.

Question 23

Why do means-tested benefits have a ceiling?

Answer 23

There is a point at which the right to claim the benefit is reduced / removed.

Question 24

Why do workers between the income tax threshold and means-tested welfare benefits ceiling become trapped in relative poverty?

Answer 24

Any increase in their pay is met by more income tax and less benefits. Therefore, they see a small increase in disposable income (possibly a fall in income).

Question 25

Why are the marginal tax rates of the low-paid so high?

Answer 25

Around 70% higher than the top 45% rate as they lose access to means-tested benefits and pay more income tax.

Question 26

What can be said about the low-paid?

Job types?

Answer 26

They often work in jobs with low job satisfaction / scope for legal tax avoidance so the disincentives to work imposed by the UK tax system affect the poor more than the rich.

Question 27

How can the poverty trap be eliminated?

Answer 27

Remove the zone of overlap in an income pyramid. (Raise income tax thresholds to remove low-waged households from the tax net (£12,750 to £15,000). The ceiling of means-tested benefits can be lowered / replaced by universal benefits.

Question 28

How are current government’s trying to pull people from the earning’s trap?

Answer 28

Introduction of a NLW.

Prevents employers from paying ‘poverty wages’.

Question 29

What is the unemployment trap?

Answer 29

Unwaged social security claimants who choose to be unemployed as being on benefits gives the more income than being in low-paid jobs that reduce access to means-tested benefits.

Question 30

What is the underground economy?

Answer 30

People in the earnings / unemployment trap who work but do not declare it as they are paid in cash.

Question 31

How can low-paid workers escape the earnings trap?

Answer 31

Give up declared work to claim means-tested benefits.

Work in the underground economy.

Question 32

What are the consequences of government policies which affect poverty and the distribution of income / wealth?

Answer 32

• Redistributive policies can make the distributions of income and wealth more equal, reducing relative poverty. However, by reducing incentives to work / removing the threat of poverty, people are disincentivised to work and there may be adverse unintended consequences such as slower economic growth and the loss of international competitiveness.
• Redistributive policies can go a long way in correcting child poverty, old-age poverty and fuel poverty but these have only been partially achieved.
• Faster economic growth is the main vehicle to reduce absolute poverty / relative poverty but according to pro-free marketeers such as Hayek and Friedman, wider inequalities may be necessary if fast growth is to be achieved.
• Some fiscal measures have actually resulted in the development of the poverty and unemployment traps. i.e. government failure.

Question 33

How can taxation operate as a policy to redistribute income / wealth?

Answer 33

Increase the level of progressive taxation - more tax revenue made from the rich - Laffer would argue it distorts incentives - Laffer curve

Reduce the level of regressive taxation (VAT, fuel duty etc.) - less burden on the poor - revenue of the government would take a big fiscal hit - possibly leading to austerity

Question 34

How can benefits ; universal, means-tested operate as a policy to redistribute income / wealth?

Answer 34

Raising benefits will help redistribute incomes as a transfer payment - poverty trap distorting incentives as you might want to stay on benefits (law of unintended consequences) - government finances also take a huge hit as they are very expensive

Question 35

How can minimum / maximum wages operate as a policy to redistribute income / wealth?

Answer 35

Those on lower wages can be artificially boosted to help those at the bottom or cap the wages of those at the top to redistribute income to the lowest - incentives are distorted yet again as there is less reason to be entrepreunerial have less profit incentives to make large amounts of money - severe brain drain will likely set in as the best people leave - employment will likely take a hit