5.3 Government Policy - Poverty

Question 1

What is fiscal drag?

Answer 1

Occurs in a progressive income tax system when the government fails to raise tax thresholds (or allowances) to keep pace with inflation

Question 2

What is the poverty trap?

Answer 2

• Fiscal drag is one of the causes of the poverty trap
• This particular trap, which traps the low waged in relative poverty is better called the earnings trap
• It affects people on low rates of pay rather than the unwaged
• Another cause of poverty: to get a homeless person a job, they need a house, but to get a house they need a job

Question 3

What are means tested benefits?

Answer 3

The ability to claim these benefits depends on a person’s income

Question 4

What is the welfare benefits ceiling?

Answer 4

The level of income at which means tested benefits cease to be paid

Question 5

What are universal benefits?

Answer 5

Benefits claimable of right and not dependent on income

Question 6

What is the earnings trap?

Answer 6

• The immediate cause of the earnings trap is the overlap between income tax thresholds and the welfare benefits ceiling
• A low paid worker caught within the zone of overlap not only pays income tax and national insurance contributions on extra £ earned, they also lose part or all of their right to claim benefits
• Thus, low paid workers and their families who fall in this zone become trapped in relative poverty since any increase in pay results in little or not increase in disposable income

Question 7

What is the marginal rate of tax?

Answer 7

Extra tax paid for each £1 extra earning

Question 8

How can the earnings trap be emliminated?

Answer 8

• Eliminating the zone of overlap
• The tax threshold could be raised to take low waged households out of the tax bracket
• Means tested benefits could be replaced with universal benefits (this is very unlikely)
• Increase the national living wage to reduce the burden

Question 9

What is the unemployment trap?

Answer 9

• Contains unwaged security claimants who choose unemployment.
• This is because they decide they are better off out of work/ living on benefits than in low paid jobs
• People born into low / no income families are more likely to repeat that cycle

Question 10

What policies could the government employ to make income more equal?

Answer 10

• Progressive taxes
• Increasing inheritance tax
• Extending universal benefits
• Increasing the National Minimum Wage
• Increased spending on public and merit goods

Question 11

What policies could the government employ to make income less equal?

Answer 11

• Regressive taxes
• Reducing inheritance tax
• Restricting universal benefits
• Reducing or maintaining National -Minimum Wage
• Reduced spending on public and merit goods