7.3 Goverment Policies To Alleviate Poverty And To Influence The Distribution Of Income And Wealth Flashcards
How can poverty increase
Cuts in welfare
Fiscal drag
How can you reduce poverty in the short run?
Making taxation progressive
Increasing welfare benefits
What do pro-free-market economists think about decreasing poverty in short run?
Worsen labour market competitiveness and reduce economic growth
Leads to a culture of welfare dependency where people are unemployed and reluctant to work
What are Government welfare benefits split into?(3 asp)
-national insurance benefits(such as state pensions)
-universal benefits
-means-tested benefits
What is a universal benefit
Households where someone who receives a pension claims the benefit regardless of income
What are means-tested benefits?
Benefits where the amount of income and capital you have can affect your eligibility
Why have the Government sought to replace universal benefits with means tested benefits?
Expensive to provide for people who don’t need them
What does the increase of mean tested benefits suggest?
Other benefits (such as national insurance) have not been increased with lime of earnings
What is the issue with means tested benefits?
Create unintended disincentive effects which prevent low wage from working harder and the unemployed seeking employment
Before tax and benefits revived what is the ratio from richest 1/5th in coke to poorest 1/5th income?
12:1
Due to benefits and indirect taxes and direct taxes what is the ratio after from richest 1/5 income to poorest 1/5 income?
4:1
What is an indirect tax?
tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased.
What are the 5 stages that taxes and benefits affect the distribution of income?
- Original income (employment private pensions, shares etc)
- Cash benefits+original income=gross income
- Households taxed resulting in remaining called disposable income
- Indirect taxes as money spent on goods and tax(money after know as post-tax income)
5l. Benefits in kind(public services from gov)+post tax income=final income
How has the UK tax system affected poverty?
Through fiscal drag
When does fiscal drag occur?
Progressive income tax system when government fails to raise tax thresholds (or personal tax allowances) to keep pace with inflation
Describe how poor people lose out with fiscal drag? Income £9,900
Sat prices and incomes double but gov fails to increase personal tax allowances in line with inflation (10k-20k e.g) they are taxed 9,800 of income and are worse of and prices have increased leading to poverty
What is the marginal tax rate?
Tax rate levied on the last pound of income received.
(Term can be applied to income taxes or all the taxes a person or business pays)
What does levied mean
Impose tax
Do rich people lose out through fiscal drag
Yes because they can be pulled into the 45% tax rate from the 40% tax rate
What does fiscal drag a cause of?
The poverty trap
What is the poverty trap
When it costs an individual more to work than stay at home
Who are the people suffering from the poverty trap
-receiving means tested benefits ceiling with taxable income (they lose their benefits)
When is the effective marginal rate of taxation of workers in poorly paid occupations high?
When the loss of means-tested benefits is added to deductions through income tax and national insurance contributions
How can you get rid of the poverty trap?
Raise the tax threshold and introduce the national living wage
What is the problem with the national living wage?
Could be counterproductive by increasing unemployment
How is the unemployment trap closely related to the poverty trap?
Both affect the poor and result from the nature of tax and benefit systems
How is the unemployment trap different to the poverty trap?
People are out of work
What are the consequences of government policies which affect poverty and the distribution of income and wealth?
-redistributive polices alleviating child, fuel and old age poverty
-decrease inequality but reduce incentives to work hard
-economic growth can decrease inequality in long run but needs inequality in short run(pro-free-market economists)
-fiscal measures to reduce inequality have led to poverty and employment traps
Persistent poverty?
Being in relative income poverty both in current year and at least 2 of the 3 preceding years
What is the palms ratio?
Ratio of income of the top 10% of income households/income of the poorest 40% of income households
What are the two types of economists?
-free market economists
-Keynesian economists
What is a Keynesian economist
Governments should stimulate economic demand in times of recession via state spending
-governments should manage the economy by using tax and interest rates to influence demand and prevent recessions
What are the 5 economic objectives that policies fall under?
-growing economy
-reducing inflation
-reducing unemployment
-reducing government debt
-reducing inequalities
What polices are used to reduce inequality?(8 asp)
-higher marginal tax rates on income and wealth
-increases in NMW
-rise in relative level of cash benefits
-measures to increase employment rates
-subsidies on energy bills, tuition , childcare etc
-rent controls to tackle unaffordable housing
-laws to tackle discrimination in the labour market
-universal basic income
What is universal basic income?
Universal basic income is a social welfare proposal in which all citizens of a given population regularly receive a guaranteed income in the form of an unconditional transfer payment
What are the two schools of thought in economics?
-free market economists
-Keynesian economists
What are two policies the gov could in introduce to alleviate poverty?
-rent controls
-NMW
What are 3 arguments in favour of the NMW
- Improves work incentives, increases labour productivity (efficiency wage theory)
- Lifts people out of working poverty(reducing means-tested welfare spending)
- Increased consumer spending because of increased disposable income more equality and growth in the economy
What is the efficiency wage theory
Theory that the employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit.
3 arguments agains the NMW?
- causes unemployment in labour-intensive industries-jobs outsourced and automated
3.Reduced price competitiveness for UK export businesses such as call centre companies or firms like Dyson
- Cost push inflation as businesses pass on their higher costs to their consumers (increased costs of production causes aggregate supply in the economy to decrease and therefore prices to rise according to the laws of supply and demand as the aggregate demand in the economy has not fallen
What is cost pull inflation?
happens when there is a decline in the supply of goods and services and demand remains unchanged or even grows, driving prices and inflation higher.
NMW: critique argument:
-improves work incentives
Doesn’t necessarily cause people to work harder-shirking model hard for firms to track individual labour productivity
NMW: critique argument:
Lifts people out of poverty
-will put some people on unemployment as the NMW causes employers to replace labour for capital. People are forced to claim benefits(gov failure-law of unintended consequences)
NMW: critique argument:
-increases consumer spending due to higher disposable income
-fiscal drag as people have falling real wages due to inflation massively increasing wages and tax brackets not being adjusted to inflation
NMW: critique argument:
-causes unemployment
-only operates under assumption firms can instantly spend heavily on expensive infrastructure which this can’t happen in labour intensive industries
NMW: critique argument:
Reduced price competitiveness
Assuming that all firms are footloose and can leave at any given point is likely incorrect as the costs to move abroad may be too high in the short-term to warrant a move to a cheaper country.
What are the two arguments in favour of the gov introducing rent controls
- Rent becomes affordable for lower income families(increased mobility)
- Releases money to be spent on goods and services (economic growth )
What are the two arguments against the gov introducing rent controls?
- Reduced supply of housing and fall in construction of rental properties as less people are incentivised to become landlords(housing falls)-homelessness (gov failure
- Gov failure (law of unintended consequences)-difficulty in implementation/ longer waiting times as less people are incentivised to invest in real estate and improve buildings
Rent controls
Critique the argument:
-renting becomes more affordable for lower income families
-centralising people in big cities increases inequality of north, south divide, causes brain drain in north as they would move south with more affordable rents
Rent controls
Critique the argument:
-releases money for people to spend on goods/services or savings?
-those with less money more likely to spend it on disposable items, unlikely to save
Rent controls
Critique the argument:
-fall in construction of new rental properties, less people are incentivised to become landlords
-assuming all landlords will remove their homes from the market is incorrect, e.g tower locks will remain on market regardless of price