7.3 government policies to alleviate poverty and to influence the distribution of income and wealth Flashcards
how can governments reduce poverty and improve the distribution of income?
making taxation more progressive and increasing welfare benefits will reduce poverty in the short run.
why could government intervention in poverty cause market failure?
pro free market economics would argue that seeking to reduce inequality will worsen the labour market incentives, competitiveness and economic growth. leading to welfare dependency and long term unemployment actually making poverty worse as low income households/jobs may fail to grow.
what is fiscal drag?
fiscal drag occurs in a progressive income tax system when the government fails to raise tax thresholds to keep pace with inflation
how does fiscal drag effect the poor?
Inflation moves people into higher income tax thresholds, meaning they pay a higher % of extra income if this is already low poor will lose proportionally higher % of income.
who does the earnings trap effect
the earnings trap effects low-waged workers in relative poverty.
explain the earnings trap
if their is an overlap between the income tax threshold and the means tested welfare benefits celling, if a low waged worker earns more money they will end up paying more income tax and national insurance each pound they earn and lose rights to claim benefits, so workers are trapped as any increase in pay has little or no increase in their disposable income disincentivising them to earn more money.
how can the earnings trap be eliminated?
by getting rid of overlapping zone e.g. income threshold could be raised to allow low waged household to get out of net tax.
means tested benefits could be replaced by universal benefits
maybe raise NLW but could cause unemployment
who does the unemployment trap effect
unemployed workers who are unwaged
what is the unemployment trap?
is where the unemployed choose to be unemployed as they decide they are better off not working and living off benefits
as in low paid jobs they will have to pay income tax, national insurance and lose some or all of their right to claim means tested benefits
what are means tested benefits
Means-tested benefits are benefits available to people who can demonstrate that their income and capital are below a certain level.
where can workers escape the earning and unemployment trap?
in the black economy- working for cash payments while failing to declare income
