Poverty

Question 1

Progressive Tax:

Answer 1

This occurs when those on higher income levels pay a higher % of their income in tax, e.g. top rate (50%) of UK income tax is progressive.

Question 2

Regressive Tax:

Answer 2

This occurs when an increase in income leads to a smaller % of their income going on the tax; e.g. excise duties and VAT take a bigger % of low-income earners.

Question 3

Causes of Relative Poverty

Answer 3

1. Inequality in Wages and Earnings Growth - Workers with high levels of skills will be able to gain higher wages. However those with low skills will find themselves in low paid jobs
2. Falling Relative value of State Benefits - Pensions and other benefits are index linked. (rising in line with inflation) This will be less than wages which increase faster than inflation.
3. Unemployment - High levels of structural and long-term unemployment are the biggest cause of poverty in the UK because people rely only on government benefits.
4. Regressive Taxes - Tax changes in the 1980s and 1990s have put a higher burden of tax on the poor. There has been a shift in taxes from progressive income tax to regressive indirect taxes, therefore causing an increase in inequality.

Question 4

Policies to help Reduce the Problem of Poverty

Answer 4

1. Sustained Economic growth - More wealth is created which can be used to redistribute income within society. However it is not necessarily the case that the wealth will “trickle down”. Growth may benefit the rich the most.
2. Reduce Unemployment - This can be done through both Supply Side and Demand side policies (see macro econ)
3. Progressive Taxes - Increasing progressive taxes such as the higher rate of income tax from 40% to 50% will take more income from those on high-income levels. This enables cuts in regressive taxes or increased benefits which benefit the poor

Question 5

Problems of Using Taxes to Redistribute Income

Answer 5

a. Disincentives of Higher Tax. Critics argue higher taxes create a disincentive to work leading to less output. This is because the Substitution Effect makes work less attractive compared to leisure. Therefore people work less and enjoy more leisure - However higher tax reduce incomes. This may encourage people to work more, in order to maintain their income. (the income effect)
b. Tax Evasion. High levels of tax will encourage more people to live abroad and avoid paying tax.
c. Distortion effect of putting taxes on goods. Indirect taxes are often trying to discourage the consumption of demerit goods such as cigarettes, but these are quite regressive.

Question 6

Policies to help Reduce the Problem of Poverty - Increasing Benefits to the poor

Answer 6

Means Tested benefits- These are government benefits that depend upon the recipient’s income or wealth; e.g. Family Credit, Income Support, Housing Benefit.
Universal Benefits- Benefits paid to everyone regardless of their income or assets; e.g. Pensions, Jobseeker’s allowance for first 6 months and State Pension

Question 7

Advantages of Means Tested Benefits

Answer 7

1. They allow money to be targeted to those who need it most.
2. It is cheaper than universal benefits and reduces the burden on the taxpayer.

Question 8

Problems of Means Tested Benefits:

Answer 8

1. People dislike being stigmatised as being poor.
2. Poverty Trap: This occurs when poor people are discouraged from working because any extra income they earn will be taken away in lost benefits and higher taxes.
3. Some relatively poor may fall just outside the qualifying limit.
4. Also not everyone entitled to means tested benefit will collect them because of ignorance or difficulties in applying.

Question 9

Problems of Means Tested Benefits: Pension Reform

Answer 9

An increase in the state pension would increase pensioners’ income and reduce inequality, as poor pensioners would have more income. However, this could be very costly because of the increased number of old people in society.
• Means tested pensions enables more money to be targeted to those who need it
• However means tested pensions may discourage people from putting money into private pensions because saving more may lead to a lower state pension.