RWEs Flashcards
The role of taxation in reducing poverty, income and wealth inequalities (simple) // further policies to reduce poverty
Effective Taxation to reduce Poverty
Mexico’s Prospera Programme 1990s - 2010s
MX gov. used tax rev. (direct & indirect) to fund Prospera programme
funded transfer payments to marginalised groups (more impoverished from discrimination & lack of opportunity)
transfer payments also increased human capital (health, & education) as they were conditional on: children attended school, having health check-ups, nutritious food
SR - immediate relief to families
LR - breaking poverty cycle via incentivising education & healthcare
Ineffective Taxation to reduce Poverty
New Zealand’s Tax System
NZ has progressive income tax HOWEVER excludes capital gains tax
so wealthier individuals end-up paying less tax than middle-class as wealthy have income in capital gains,
IRD 2023 report - wealthy pay an effective tax rate of under 10%,
middle-classes - effective tax rate of 20%
disincentivising increasing ones tax bracket to middle class
increasing income/wealth inequality - poverty cycle
loss of tax revenue, high opportunity costs
Expansionary monetary policies to close deflationary gaps (detail)
Effectiveness of expansionary monetary policy to close deflationary gaps
Abenomics in Japan 2010s
In an attempt to combat deflation, the Japanese government pursued a mix of monetary easing by the BoJ, fiscal stimulus and structural reforms
Although the expansionary monetary policy was effective in combating deflation, it took time and required complementary policies
Abenomics focused on stimulating short term growth, fiscal stimulus, as one out of its three ‘arrows’. Under this ‘arrow’ Abenomics involved increasing government spending which is a Keynesian approach to boosting AD. This included over 10.3 trillion yen in direct government spending on infrastructure projects. The government also intervened to create 600,000 jobs in two years to reduce unemployment and stimulate economic activity.
This fiscal stimulus aligns with the belief that AD boosts from the government are needed to break out of the short run. The positive effects of the fiscal stimulus is seen as unemployment rate fell to 2.7% which was the lowest in 23 years, and ratio of public debt to GDP stabilised after years of rapid increase. Japan’s GDP grew for seven consecutive quarters, its longest spell of uninterrupted growth in 16 years.
However, Abenomics also included monetary easing and structural reforms to complement the fiscal stimulus. This could suggest that AD stimuli are not enough.
Ineffectiveness of expansionary monetary policy to close deflationary gaps
Japan’s Lost Decade 1990s
Japan faced prolonged deflation and stagflation.
The BoJ lowered interest rates to near zero and engaged in large asset purchases (quantitative easing)
Despite these efforts, borrowing and investments did not increase because Japan was in liquidity trap where individuals were preferring to hold cash due to low confidence
Contractionary monetary policies to close inflationary gaps (detail)
Effectiveness of contractionary monetary policy
Volcker Shock in US 1979-1982
The US was facing extremely high inflation in double digits
The federal reserve raised interest rates significantly tightening money supply and curbing lending
By 1983 interest dropped to 3%
It laid the foundation of low inflation and steady economic growth
However, unemployment increased to 10% and economic activity was reduced
The role of taxation in reducing poverty, income and wealth inequalities (detail) // further policies to reduce poverty
Effective Taxation to reduce Poverty
Mexico’s Prospera Programme 1990s - 2010s
Mexican Government used tax revenues to fund Prospera Programme via income taxes (both corporate & personal), and value-added taxes (indirect)
The tax revenue funded targeted cash transfers towards specifically indigenous, rural, low income families which often suffer more from poverty due to discrimination and lack of opportunity
Furthermore, poorer households received greater cash transfers
To ensure these cash transfers also increased human capital via health, and education, the cash transfers were provided based on conditions that children attended school, had health check-ups, and had more nutritious food, wherein, these conditional cash transfers to rural families were significant as these groups were most likely to leave school prematurely, and neglect health
This had SR impacts of immediate relief to families, and LR impacts of breaking the poverty cycle through incentivising education and healthcare which provides opportunities to these disadvantaged groups
Effectiveness: decreased the extent, and severity of poverty, increased human capital through greater child health, nutrition, and education rates, and reduced income inequality gaps via direct redistribution of wealth
Ineffective Taxation to reduce Poverty
New Zealand’s Tax System
Although NZ has a progressive income tax system, as their tax system excludes a capital gains tax, the wealthier individuals end-up paying less tax than middle-class families as wealthier individuals have the majority of their income is in the form of capital gains, thus in effect, a regressive tax. According to the IRD from a report in 2023, the wealthiest families pay an effective tax rate of under 10%, whereas, middle-classes pay an effective tax rate of 20.2%—thus potentially disincentivising increasing ones tax bracket to middle class
Capital gains are often the primary form of income for the top 1% of earners, yet they go untaxed in New Zealand. This loophole allows wealthy individuals to accumulate wealth more rapidly while paying proportionally less in taxes—worsening wealth inequality.
Insufficient tax revenue from wealthy is forgone revenue which could have been used for poverty, and inequality reduction
Ineffective wealth distribution causes the cycle of poverty to be perpetuated
This demonstrates that tax systems may not always be effective in addressing inequality, as the structure of the tax system is important, depending on whether the structure targets income of wealthy individuals, or that of middle-class individuals
Expansionary monetary policies to close deflationary gaps (simple)
Effectiveness of expansionary monetary policy to close deflationary gaps
Abenomics in Japan 2010s
combat deflation:
- expansionary monetary policy (quantitative easing AKA purchasing bonds & financial assets which injects money into economy by creating money & lowering interest rates)
- fiscal stimulus (direct government spending on infrastructure projects)
unemployment rate fell to 2.7% (lowest in 23 years)
Japan’s GDP grew for 7 quarters
ratio of public debt to GDP stabilised after years of rapid increase
Ineffectiveness of expansionary monetary policy to close deflationary gaps
Japan’s Lost Decade 1990s
(prolonged deflation & stagflation)
- interest rates almost 0%
- quantitative easing
borrowing & investments did not increase
due to ‘liquidity trap’ (individuals preferred cash w/ low confidence)
Contractionary monetary policies to close inflationary gaps (simple)
Effectiveness of contractionary monetary policy
Volcker Shock in US 80s
double digit inflation
- then raised interest rates significantly tightening money supply & curbing lending
-1983 interest dropped to 3% - low inflation achieved
- unemployment increased to 10% & economic activity was reduced
Expansionary fiscal policy to close deflationary gaps (detail)
Effectiveness of expansionary fiscal policy to close deflationary gaps
The Great Recession US 2007-2009
The Great Recession occurred as a result of high housing debts and failure in financial regulation.
Combination of tax cuts and increased government spending, especially to support house owners and the mortgage market to combat the housing crisis during the time, was implemented to support the economy.
Helped stabilise the economy by promoting recovery
Additionally, unemployment benefits served as an automatic stabiliser as more individuals were laid off, they were qualified for unemployment compensation which helped to support AD.
Decreased government revenue and increased spending resulted in significant government debt increases
Ineffectiveness of expansionary fiscal policy to close deflationary gaps
Japan’s Lost Decade 1990s
As well as expansionary monetary policies, the Japan government also implemented several fiscal stimulus packages such as tax cuts and provision of merit and public goods during the Lost Decade.
However, this was ineffective as the tax cuts were inconsistently implemented and not targeted. Additionally, a lot of the fiscal spending went towards public work projects which had low productivity and did not stimulate the economy.
The government also misunderstood the cause of the recession, treating it as cyclical instead of structural. This led to ineffective fiscal stimulus instead of structural reforms.
Between 1993 and 2000, average growth was slightly above 1%, and tax revenue remained almost flat, leading to larger fiscal deficits.
Government debt as a percentage of GDP rose from around 60% in 1990 to over 140% by 2000
Expansionary fiscal policy to close deflationary gaps (simple)
Effectiveness of expansionary fiscal policy to close deflationary gaps
The Great Recession US 2007-2009
- occurred from high housing debts & failure in financial regulation
- tax cuts & increased government spending
- directed to support house owners & mortgage market to combat housing crisis
- helped stabilise the economy by promoting recovery
- unemployment benefits served as an automatic stabiliser as more individuals were laid off, they were qualified for unemployment compensation which helped to support AD.
- significant government debt increases
Ineffectiveness of expansionary fiscal policy to close deflationary gaps
Japan’s Lost Decade 1990s
- tax cuts & provision of merit & public goods
- ineffective as the tax cuts were inconsistently implemented & not targeted
e.g. fiscal spending towards public work projects w/ low productivity & no stimulus to economy. - gov. misunderstood cause of recession (thought it was cyclical instead of structural)
- thus ineffective fiscal stimulus instead of structural reforms.
- budget deficits increased
- gov. debt as a % of GDP rose from around 60% in 1990 to over 140% by 2000
Contractionary fiscal policies to close inflationary gaps (detail)
Argentina government 2024 - link
There are deep cuts in government spending on public expenditures, including a 35% reduction in real primary expenditures compared to the previous year.
Deficit Reduction: The government set an ambitious goal to cut the budget deficit by 5% points of GDP in 2024.
Pension Reductions: Pensions decreased by 36% year-over-year, contributing 43% of the total reduction in government budget deficit.
Subsidy Reductions: Economic subsidies, particularly for energy firms, have been reduced.
Although a slow recovery of real wages and an improved 2023/24 agricultural harvest may provide short-term relief, the government must seek alternative fiscal strategies to mitigate the heavy toll on the private sector to ensure economic growth.
The minimum monthly pension is approximately $233, while the cost of a standard basket of goods and services exceeds $300 per month. This has pushed many retirees below the poverty line.
Disproportionate impact of austerity: Private studies estimate that more than 33% of President Milei’s fiscal adjustment has fallen on the retirement and pension system, which benefits some seven million people.
Widening income gap: The pension cuts have contributed to rising poverty levels, with more than half of the population now living in poverty.
Legal challenges: The complexity of pension reforms and non-compliance with constitutional provisions for pension mobility has resulted in numerous legal actions by beneficiaries, creating uncertainty in the system.
Contractionary fiscal policies to close inflationary gaps (simple)
Argentina government 2024 - link
- high inflation
- extensive cuts in gov. spending on public expenditures
- ambitious goal to cut budget deficit by 5% points of GDP in 2024.
- pension reductions contributing 43% of the total reduction in government budget deficit
- subsidy reductions: (particularly for energy firms)
- slow recovery of real wages
- heavy toll on the private sector stifling economic growth.
- pushed many retirees below the poverty line - pension system, which benefits some seven million people
- widening income gap: contributed to rising poverty levels, with more than half of the population now living in poverty
- uncertainty in econ
Supply-side policies (detail)
Interventionist supply side policy
South Korea 1960s - 1990s
-gov invested heavily in education & skills development to build a highly skilled workforce
Focus on technological education fostered a culture of innovation. Leading to the sustained growth of high-tech industries.
Annual GDP growth rate increased to 8.6% from 1962 to 1989
Literacy rates increased from 71% to 98%
Unemployment rate decreased from 8.1% to 2.4%
The country’s export-oriented industrialization strategy, implemented through five-year plans, led to significant increases in GDP and export revenues. This economic expansion provided the government with increasing tax revenues, reducing the need for extensive borrowing.
Additionally, the flexibility of the south korean labour market due to minimal government intervention, lack of bargaining power and employee rights allowed its economy to rapidly grow further reducing the need for the government to borrow and not experience a time lag.
The South Korean government closely managed its external borrowing by borrowing domestically from the chaebols (large conglomerates) which led to their outsized influence on the economy and inefficient allocation of resources.
Market based supply side policy
The Reagan administration in the US 1980s
Incentive based: The administration reduced tax on business and consumers to incentivise unemployed workers and existing workers to work harder. Manufacturing productivity grew 3.8% annually and the real GDP had an annual growth rate of 3.6%
Deregulation: Deregulation in telecommunications and electricity allowed an increase in competition which increased efficiency and resource allocation in these sectors. Thus leading to economic growth.
Unemployment fell from 7% to 5.4% in 1988
Tax cuts disproportionately benefited high income earners and stock owners, income inequality increased significantly. By 1986, over 30% of black Americans had income below the official poverty level and the Gini coefficient increased significantly, reaching 0.45 compared to white Americans with 0.382.
To try and balance the reduced government revenue, Reagan reduced funding to multiple domestic welfare programs, including Social Security, Medicaid, Food Stamps, education, and job training programs. This likely had a negative impact on lower-income Americans who relied on these programs.
Although more jobs were created through labour market reform and incentives, there was a shift in job quality. Instead of more highly paid jobs, there was an acceleration of lower-paying, non-union, often part-time jobs. Almost half of the new jobs created during the Reagan years were part-time
Supply-side policies (simple)
Interventionist supply side policy
South Korea 1960s - 1990s
- gov. invested in education & skills development to build a highly skilled workforce
- labour market for manufacturing/tech goods
- focused on technological education - fostered a culture of innovation
- caused sustained growth of high-tech industries.
- GDP growth rate increased
- literacy rates increased
- unemployment rate decreased
- export-oriented industrialization strategy
- significant increases in GDP & export revenues
- increasing tax revenues allowing more investment/less debt&borrowing
- S.K gov. borrowed domestically from chaebols (large conglomerates) & led to their monopoly/control/regulator capture/tax exemptions & inefficient allocation of resources & inequality
Market based supply side policy
The Reagan administration in the US 1980s
- reduced tax on business & consumers to incentivise unemployed workers & existing workers to work harder
- reduced funding to welfare programs (Medicaid, Food Stamps, education, & job training programs) to finance budget deficit
- manufacturing productivity grew 3.8% annually & the real GDP growth
- deregulation in telecommunications & electricity infrastructure allowed competition (increasing AE) & economic growth via lower CoP
- unemployment reduced HOWEVER reduced labour quality, & were mostly low-paying / part-time jobs
- tax cuts disproportionately benefited high income earners & stock owners
- income inequality increased significantly. (Gini coefficient increased for black americans)
Relative costs of unemployment versus inflation
Cost of high unemployment
2008 U.S financial crisis
- high unemployment lead to great recession
- unemployment rate doubled & remaining elevated
- severe LR costs for American workers & families as job losses & wage cuts occurred & persisted over a 3-year period
- displaced workers, & reduced earnings
- Household net worth dropped many forgo spending on essentials such as healthcare causing reduced life expectancy
- worsening inequality as African Americans disproportionately affected by
- High underemployment
- discourage in future economy
- Housing market collapsed
- decrease household wealth
- decreased AD caused business failure
LR gov. understood importance of labour market reforms & implemented unemployment benefits to safeguard
Cost of high inflation
Inflation in US 20th century
-Inflation double-digits
-eroded purchasing power (regressionary) worsening income equality
-Inflation reduced disposable income, & increased prices of necessity goods -ppl. cut back on non-essential spending
-pp. rushed to buy goods before prices increased further
-decline of real wages
-labour unrest (labour disputes & strikes)
-higher interest rates to nearly 20% then borrowing expensive
-slowed economic growth
-economic uncertainty
Appropriateness of using GDP or GNI statistics to measure economic well-being—use of national income statistics for making:
(simple)
comparisons over time
comparisons between countries
- Costa Rica high in global happiness indices but not GDP per capita
- 2019, Costa Rica ranked 12th in the World Happiness Report with low GDP per capita | compared to US ranking 19th
- Sub-Saharan Africa, informal economy estimated to about 40% of GDP & not reflected in official GDP figures
- underestimating the true lvl of economic activity & well-being.
Potential conflict between macroeconomic objectives (detail)
Short run Phillips curve - Volcker Shock in US 1979-1982
This shows an inverse relationship between unemployment and inflation rates
The US was facing extremely high inflation in double digits
The federal reserve raised interest rates significantly tightening money supply and curbing lending
By 1983 interest dropped to 3%
However, unemployment increased to 10% and economic activity was reduced
Long run Phillips curve - Stagflation
The long-run Phillips curve suggests that there is no permanent trade-off between inflation and unemployment. In the long run, the economy tends to return to its natural rate of unemployment regardless of the inflation rate.
The U.S. experienced both high unemployment (above 8% by 1975) and high inflation (over 12% by 1974).
High economic growth and low inflation
The U.S. faced a period of “stagflation” - high inflation combined with slow economic growth and high unemployment. Inflation rates reached double digits, peaking at 13.5% in 1980, while economic growth struggled.
China managed to maintain relatively low inflation while achieving high economic growth rates. In 2022, China’s inflation rate was 1.8%, one of the lowest in the world. Meanwhile, the country has consistently achieved high GDP growth rates over the past decades, often exceeding 6% annually.
China was able to achieve this due to strategically developing specific sectors such as advanced technology and manufacturing and new infrastructure, these sectors support the quality and sustainability of economic development and growth. They also have market-oriented reforms which introduced profit incentives to rural enterprises which increased economic efficiency.
High economic growth and environmental sustainability
Refer to consequences of growth Japan 1960 - 1990 to see the conflict
However, high economic growth and environmental sustainability can be pursued together when the government takes appropriate measures. An example of this is Costa Rica.
From 1960 to 2019, Costa Rica’s GDP per capita has more than tripled from 2000 to 12000. Despite this growth, nearly 100% of Costa Rica’s electricity comes from renewable sources and forest cover increased from 26% in 1983 to over 50% today, thanks to policies that incentivize forest protection and reforestation. This allows Costa Rica to have successfully developed a sustainable tourism industry that contributes to both economic growth and environmental conservation.
High economic growth and equity in income distribution
Refer to consequences of growth Reagan administration to see the conflict
The conflict between equity in income distribution and high economic growth can be avoided according to the type of policy countries adopt. The Asian tigers had extremely high economic growth rates and income distribution remained relatively stable, especially in South Korea. Due to the interventionist supply side policies the government implemented, South Korea experienced annual GDP growth rate increases to 8.6% from 1962 to 1989. This was accompanied by a gradual decrease in the Gini coefficient from 0.344 in 1965 to 0.281 in 1995. This was made possible by investments in primary and secondary education which allowed the development of workforce productivity and created a larger and more skilled labour force.
