4.1.7.3 - Government policies to alleviate poverty and to influence the distribution of income and wealth

Types of Policies to Influence Distribution of Wealth/Income to alleviate Poverty

• Redistributing Income using Tax System

• Redistributing Income using Benefits System

• Increasing the National Minimum Wage

• Reduce Unemployment

• Boost Economic Growth

Redistributing Income using Benefits System

Government can increase level of welfare benefits → lifts people out of poverty & reduces inequality

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Cash Benefits:

• Given to those on low or 0 original income

• Means-tested benefits (universal credit, job-seekers allowance, pension credit)

• Universal benefits (child benefit, bus passes for pensioners)

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Benefits in Kind:

• Non-cash benefits - services provided free or heavily discounted at the point of consumption

• e.g. free/subsidised healthcare, education)

Redistributing Income using Tax System

Government can make taxes more progressive → lifts people out of poverty & reduces inequality

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Direct Taxes:

• Progressive tax directly on income earned

• No tax on £0 - £12,570

• 20% on £12,571 - £50,270

• 40% on £50,271 - £125,140

• 45% on £125,140+

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Indirect Taxes:

• Tax levied on the sale of goods & services

• Regressive because proportion of tax paid as a % of income decreases at higher income levels

• e.g. VAT, tobacco duty, sugar tax, alcohol duty

Diagram Summary of Redistribution of Income using Tax & Benefits System

Progressive Taxation =

A tax in which the tax rate increases as the taxable amount increases.

UK Progressive Tax System (numbers)

• No tax on £0 - £12,570

• 20% on £12,571 - £50,270

• 40% on £50,271 - £125,140

• 45% on £125,140+

Means-tested Benefits =

The ability to claim benefits depends on the person's income

Universal Benefits =

Benefits claimable of right and not dependent on a person’s income

• different to universal credit

Poverty Trap =

When there is no incentive for someone who is on low rates of pay to look for work or work longer hours because the combined loss of benefits and need to pay income tax would result in them being worse off.

Unemployment Trap =

When there is no incentive for someone who is on unemployed to look for work or work longer hours because the combined loss of benefits and need to pay income tax would result in them being worse off.

Fiscal Drag =

Occurs in a progressive tax system when the government fails to raise tax thresholds in line with inflation.

Increasing the National Minimum Wage

Minimum Wage aims to:

• Remove in-work poverty

• Reduce the disincentive effects of the poverty/unemployment trap

Policies to Reduce Unemployment

Government can increase spending on policies to reduce u/e → lifts people out of poverty

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Supply-side Policies:

• Reduce occupational immobility (e.g. introduce apprenticeship schemes)

• Reduce geographical immobility (e.g. invest in new house-building programme)

• Education and training

Policies to Boost Economic Growth

Gov can use policies to boost EG (fiscal, monetary, ssis) → Increases total income in society → Increased DD4L → Increases employment & income

Advantages & Disadvantages of Using Tax System

Advantages & Disadvantages of Using Benefits System

Advantages & Disadvantages of Increasing NMW

Advantages & Disadvantages of Reducing Unemployment

Advantages & Disadvantages of Boosting EG

Evaluating (IDO’s) use of Policies to Influence Distribution of Wealth/Income to alleviate Poverty

• Know whether need to tackle Absolute or Relative poverty

• Fairness requires value judgement

• Gov failure - unintended consequences (e.g. abuse of system)