Policies to help Reduce the Problem of Poverty UK
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. See: Inequality and economic growth
2. Reduced Unemployment
Through both Supply Side and Demand side policies (see notes on Unemployment for more detail)
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 and increased benefits which help increase the income of the poor.
Problems of Using Taxes to Redistribute Income
1. Disincentives of Higher Tax
Critics argue higher income taxes create a disincentive to work., leading to less output. This is because higher tax makes work less attractive and reduces the opportunity cost of leisure. Therefore people work less and enjoy more leisure. This is known as the Substitution Effect
· Higher corporation tax may discourage investment in the UK
However this is disputed by other economists. Higher Tax reduce incomes and this may encourage people to work more, to maintain their income. (This is known as the income effect)
· Evidence suggests that higher income tax has little incentive on the supply of labour, suggesting Labour supply is relatively inelastic. However, it also depends at what level income tax is set. There is certainly a level where higher income tax will reduce incentives to work.
2. Tax Evasion.
High levels of tax will encourage more people to use off shore accounts to avoid paying UK income tax.
3. Firms may adjust wages to compensate
E.g firms may increase wages to those who are taxed and pay lower wages to those who pay less tax
4. Admin costs of collecting taxes
5. Distortion effect of putting taxes on goods
· Indirect taxes are often overcoming market failure for demerit goods such as cigarettes, therefore cutting taxes may encourage consumption of demerit goods.
4. Increasing Benefits to the poor
Means tested benefits involve increasing welfare benefits to those on low incomes.
Advantages of means tested benefits
1. They allow money to be targeted to those who need it most. e.g family tax credit or pension credit.
2. It is cheaper than universal benefits and reduces the burden on the tax payer
· However means tested benefits are often unpopular because people are stigmatised as being poor.
· Also it may create a disincentive to earn a higher wage, because if you do get a higher paid job you will lose at least some of your benefits and pay more tax. This is known as “the benefit trap” or the “poverty trap”
· Some relatively poor may fall just outside the qualifying limit.
· Also not everyone entitled to means tested benefit will collect them because of ignorance or difficulties in applying.
The government used to prefer universal benefits because it avoided the above problem, and people feel if they contribute towards taxes they deserve their benefits regardless of their wealth.
However in recent years, the welfare state has faced increased demands due to demographic factors leading to more calls for means tested benefits
Where people on low incomes are discouraged from working extra hours or getting a higher paid job because any extra income they earn will be taken away in lost benefits and higher taxes.
To avoid the poverty trap the government can grade benefits so that there isn’t an immediate cut off point.
4. Pension Reform
a) Linking State pensions to earnings and not inflation.
This would increase pensioners income and reduce inequality as poor pensioners would have more income
· However this would be very costly because of the demographic changes and increased numbers of old people.
b) Means Tested Pensions.
This enables more money to be targeted to those who need it . However it may discourage people from putting money into private pension schemes.
c) Compulsory Company pensions schemes
5. National Minimum Wage ( see NMW)