7.3 Goverment Policies To Alleviate Poverty And To Influence The Distribution Of Income And Wealth

Question 1

How can poverty increase

Answer 1

Cuts in welfare
Fiscal drag

Question 2

How can you reduce poverty in the short run?

Answer 2

Making taxation progressive
Increasing welfare benefits

Question 3

What do pro-free-market economists think about decreasing poverty in short run?

Answer 3

Worsen labour market competitiveness and reduce economic growth

Leads to a culture of welfare dependency where people are unemployed and reluctant to work

Question 4

What are Government welfare benefits split into?(3 asp)

Answer 4

-national insurance benefits(such as state pensions)
-universal benefits
-means-tested benefits

Question 5

What is a universal benefit

Answer 5

Households where someone who receives a pension claims the benefit regardless of income

Question 6

What are means-tested benefits?

Answer 6

Benefits where the amount of income and capital you have can affect your eligibility

Question 7

Why have the Government sought to replace universal benefits with means tested benefits?

Answer 7

Expensive to provide for people who don’t need them

Question 8

What does the increase of mean tested benefits suggest?

Answer 8

Other benefits (such as national insurance) have not been increased with lime of earnings

Question 9

What is the issue with means tested benefits?

Answer 9

Create unintended disincentive effects which prevent low wage from working harder and the unemployed seeking employment

Question 10

Before tax and benefits revived what is the ratio from richest 1/5th in coke to poorest 1/5th income?

Answer 10

12:1

Question 11

Due to benefits and indirect taxes and direct taxes what is the ratio after from richest 1/5 income to poorest 1/5 income?

Answer 11

4:1

Question 12

What is an indirect tax?

Answer 12

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.

Question 13

What are the 5 stages that taxes and benefits affect the distribution of income?

Answer 13

1. Original income (employment private pensions, shares etc)
2. Cash benefits+original income=gross income
3. Households taxed resulting in remaining called disposable income
4. 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

Question 14

How has the UK tax system affected poverty?

Answer 14

Through fiscal drag

Question 15

When does fiscal drag occur?

Answer 15

Progressive income tax system when government fails to raise tax thresholds (or personal tax allowances) to keep pace with inflation

Question 16

Describe how poor people lose out with fiscal drag? Income £9,900

Answer 16

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

Question 17

What is the marginal tax rate?

Answer 17

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)

Question 18

What does levied mean

Answer 18

Impose tax

Question 19

Do rich people lose out through fiscal drag

Answer 19

Yes because they can be pulled into the 45% tax rate from the 40% tax rate

Question 20

What does fiscal drag a cause of?

Answer 20

The poverty trap

Question 21

What is the poverty trap

Answer 21

When it costs an individual more to work than stay at home

Question 22

Who are the people suffering from the poverty trap

Answer 22

-receiving means tested benefits ceiling with taxable income (they lose their benefits)

Question 23

When is the effective marginal rate of taxation of workers in poorly paid occupations high?

Answer 23

When the loss of means-tested benefits is added to deductions through income tax and national insurance contributions

Question 24

How can you get rid of the poverty trap?

Answer 24

Raise the tax threshold and introduce the national living wage

Question 25

What is the problem with the national living wage?

Answer 25

Could be counterproductive by increasing unemployment

Question 26

How is the unemployment trap closely related to the poverty trap?

Answer 26

Both affect the poor and result from the nature of tax and benefit systems

Question 27

How is the unemployment trap different to the poverty trap?

Answer 27

People are out of work

Question 28

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

Answer 28

-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

Question 29

Persistent poverty?

Answer 29

Being in relative income poverty both in current year and at least 2 of the 3 preceding years

Question 30

What is the palms ratio?

Answer 30

Ratio of income of the top 10% of income households/income of the poorest 40% of income households

Question 31

What are the two types of economists?

Answer 31

-free market economists
-Keynesian economists

Question 32

What is a Keynesian economist

Answer 32

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

Question 33

What are the 5 economic objectives that policies fall under?

Answer 33

-growing economy
-reducing inflation
-reducing unemployment
-reducing government debt
-reducing inequalities

Question 34

What polices are used to reduce inequality?(8 asp)

Answer 34

-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

Question 35

What is universal basic income?

Answer 35

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

Question 36

What are the two schools of thought in economics?

Answer 36

-free market economists
-Keynesian economists

Question 37

What are two policies the gov could in introduce to alleviate poverty?

Answer 37

-rent controls
-NMW

Question 38

What are 3 arguments in favour of the NMW

Answer 38

1. Improves work incentives, increases labour productivity (efficiency wage theory)
2. Lifts people out of working poverty(reducing means-tested welfare spending)
3. Increased consumer spending because of increased disposable income more equality and growth in the economy

Question 39

What is the efficiency wage theory

Answer 39

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.

Question 40

3 arguments agains the NMW?

Answer 40

2. 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

1. 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

Question 41

What is cost pull inflation?

Answer 41

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.

Question 42

NMW: critique argument:
-improves work incentives

Answer 42

Doesn’t necessarily cause people to work harder-shirking model hard for firms to track individual labour productivity

Question 43

NMW: critique argument:
Lifts people out of poverty

Answer 43

-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)

Question 44

NMW: critique argument:
-increases consumer spending due to higher disposable income

Answer 44

-fiscal drag as people have falling real wages due to inflation massively increasing wages and tax brackets not being adjusted to inflation

Question 45

NMW: critique argument:
-causes unemployment

Answer 45

-only operates under assumption firms can instantly spend heavily on expensive infrastructure which this can’t happen in labour intensive industries

Question 46

NMW: critique argument:

Reduced price competitiveness

Answer 46

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.

Question 47

What are the two arguments in favour of the gov introducing rent controls

Answer 47

1. Rent becomes affordable for lower income families(increased mobility)
2. Releases money to be spent on goods and services (economic growth )

Question 48

What are the two arguments against the gov introducing rent controls?

Answer 48

1. Reduced supply of housing and fall in construction of rental properties as less people are incentivised to become landlords(housing falls)-homelessness (gov failure
2. 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

Question 49

Rent controls
Critique the argument:
-renting becomes more affordable for lower income families

Answer 49

-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

Question 50

Rent controls
Critique the argument:
-releases money for people to spend on goods/services or savings?

Answer 50

-those with less money more likely to spend it on disposable items, unlikely to save

Question 51

Rent controls
Critique the argument:

-fall in construction of new rental properties, less people are incentivised to become landlords

Answer 51

-assuming all landlords will remove their homes from the market is incorrect, e.g tower locks will remain on market regardless of price