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Receipt of these benefits, other than Housing Benefit and tax credits is a passport to other non-cash help such as free school meals, free prescription charges, Legal Aid, cold weather payment. The claimant, their partner and dependent children are covered.
1. Sustained economic growth- here is a concern that economic growth could widen relative poverty because it benefits the highly skilled and wealthy classes more than those at the bottom
2. Reduce Unemployment- Unemployment is a major cause of poverty because the unemployed have little income, relying on state benefits. Unemployment can be reduced through both supply Side and demand side policies
3. Progressive Taxes- This can be an effective way for reducing relative poverty. However, critics argue higher income taxes create a disincentive to work., leading to less output, However this is disputed by other economists. Higher tax reduces incomes and this may encourage people to work more, to maintain their income.
4. Increasing benefits to the poor -
Advantages of means tested benefits:
However the problem with using benefits to reduce poverty include:
However in recent years, the welfare state has faced increased demands due to demographic factors leading to more calls for means tested benefits.
5. National Minimum Wage - The government could increase the national minimum wage. This is an effective way of increasing the incomes of the low paid, and therefore reducing wage inequality.
However, the problem is that it may cause unemployment because firms may not be able to afford the workers. If it does cause unemployment, poverty could worsen. However, if firms have monopsony power then they will be able to afford higher wages.
A related concept is the Voluntary Living Wage – an attempt to encourage firms to pay higher wages.
6. Benefits in kind. These are important public services which are provided free at the point of use (or subsidised). They mainly involve education and health care. Free education enables those from low income families to gain skills and qualifications which can help lead to better jobs and higher incomes in the future.
7. Universal basic income (UBI) A universal basic income or citizen’s income involves giving every citizen a weekly benefit – regardless of circumstances and income. The idea is to ensure everyone has a minimum income guarantee, but without any disincentives of losing means tested benefits from working more. See more at: Universal basic income (UBI)
Tax policy can play a major role in making the post-tax income distribution less unequal. In addition, tax policy is crucial for raising revenues to finance public expenditure on transfers, health and education that tend to favour low-income households, as well as on growth-enabling infrastructure that can also increase social equity.
The effects of taxation on income distribution needs to be seen in the context of the trade-offs between growth and equity, and this means looking at the overall effects of any reform on the fiscal regime as a whole, and not just at whether individual taxes are progressive or regressive.
This is because the distribution of disposable incomes depends on both taxes and benefits. Raising indirect taxes, for instance, is often regressive where these taxes fall on the consumption of goods and services that make up a larger share of the budgets of poorer than richer households. But the overall impact of a fiscal reform can still be progressive, if these effects are offset by other tax and benefit changes.
Income-related benefits, for example, are a much more efficient way of increasing the disposable income of poorer households than reduced rates of VAT.
Simply raising marginal personal income tax rates on high earners will not necessarily bring in much additional revenue, because of effects on work intensity, career decisions, tax avoidance and other behavioural responses.
Where tax increases are necessary, the most growth-friendly approach would be to reduce tax-induced distortions that harm growth, including closing loopholes, and to raise more revenues from recurrent taxes on residential property, while setting taxes to reduce environmental damage and correct other externalities.
There is also scope to raise taxation of residential property which is relatively lightly taxed in many countries. However, while the better off tend to own the most expensive residential property, there are many middle class owners too, so reform has to be approached cautiously, especially given the bruising many home-owners took from the housing bubble.
Nevertheless, out-of-date values for tax purposes often distort the efficiency of property markets (by discouraging individuals from moving home, thus reducing labour mobility) and many existing property taxes tend to be regressive, i.e. take proportionally more of the income of poorer households. Reform and revaluation could make property taxes both fairer and less distortive.
Good tax administration also matters. New IT systems in use in revenue administrations increasingly include tools such as sophisticated risk engines to identify potential missing revenues. Efforts to curb offshore non-compliance by making the exchange of information among tax authorities more effective have been given a new impetus. Tax evaders, who are often wealthy, have fewer places to hide their money. These initiatives also bolster international efforts by the IMF, OECD, UN and World Bank to help low-income countries to develop more effective tax systems.
Capital gains tax can effect economic growth, when the tax rate is high investment will decrease however the opposite will occur when the tax rate is low, the benefit of this is that the government can therefore use capital gains tax to influence behaviour.
Another merit is that this form of taxation does promote equality as it is a tax on the profit made when an asset is sold, people making gains.
A Capital Gains Tax may be regarded as reducing inequality of wealth in much the same way as a progressive income tax system.
One merit of inheritance tax is that it motivates charitable contributions because charitable donations are exempt from the tax and may also reduce the rate of tax that is paid. This motivation would be diminished if inheritance tax was abolished. However some may argue that death isn't the most appropriate time to impose a tax. Another benefit is that this tax is in line with the equity principle where by a person is taxed according to his/her ability to pay
The main aim of this form of taxation is to reduce inequality through the redistribute income and wealth,
A merit of value added tax is the level of horizontal equality associated, everyone that buys a certain product has to pay the same level of VAT and if a person spends more on those products they pay more VAT, in a way giving people choice.
Another merit is how this type of tax can be used to influence behaviour for example if there was a high VAT on petrol consumption of this in theory would fall, this technique could be used for the greater good of the economy.
However if the VAT was set too high it could just lead to inflation and maybe even a decrease in the standard of living.
Value added tax is also efficient as the cost of collection is minimal because collection takes place automatically when goods/services are bought and sold, Adam smith (1776) suggested that this was a principle of a "good tax". This method of collection also makes tax evasion very difficult.
In economics, a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented.
Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.
In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.
A negative income tax is intended to create a single system that would not only pay for government, but would also fulfill the social goal of making sure that there was a minimum level of income for all.
Negative income tax (NIT) would allow claimants to receive income through the simple filing of tax returns rather than through the claiming of welfare benefits, ideally eliminating the need for a complex welfare bureaucracy.
The poverty trap is a mechanism which makes it very difficult for people to escape poverty. A poverty trap is created when an economic system requires a significant amount of various forms of capital in order to earn enough to escape poverty. When individuals lack this capital, they may also find it difficult to acquire it, creating a self-reinforcing cycle of poverty.
BREAKING DOWN 'Poverty Trap'
In order to escape the poverty trap:
It is argued that individuals in poverty must be given sufficient aid so that they can acquire the critical mass of capital necessary to raise themselves out of poverty. This theory of poverty helps to explain why certain aid programs which do not provide a high enough level of support may be ineffective at raising individuals from poverty.
If those in poverty do not acquire the critical mass of capital, then they will simply remain dependent on aid indefinitely and regress if aid is ended.
Poverty trap is a spiraling mechanism which forces people to remain poor. It is so binding in itself that it doesn't allow the poor people to escape it. Poverty trap generally happens in developing and under-developing countries, and is caused by a lack of capital and credit to people.
Poverty trap can be broken by planned investments in the economy and providing people the means to earn and be employed. A series of poverty alleviation programs can be enforced to raise individuals out of poverty by providing monetary aid for a period of time.
But if the plan fails, people will become dependent on such programs forever and may even go deeper down in the poverty spiral. However, poorer countries find this to be difficult, leading to the over-exploitation of natural resources and land.
1. Reduce benefits.
If benefits are reduced or abolished, such as income support there is a greater incentive to get a better paid job. However, this may increase relative poverty as the low paid will get lower incomes compared to the rest of the population.It may cause the unemployment trap. It will reduce the gap between unemployment benefits and low paid work.
2. Have a Graded system of Benefits.
This means that if your income increases you still get some benefits. There isn't an immediate cut off point, but, there is still an incentive to work longer hours and get a better paid job.
3. Increase the Income Tax Threshold.
This means that you increase the amount of income that you can earn before you start paying any tax. At the moment, it is around £5,000. Increasing this limit gives a greater incentive to work and earn more.
4. Increased Minimum Wages.
A higher minimum wage helps to make work more attractive. However, if it is too high it might cause a rise in unemployment. However, the increase in the UK minimum wages since '97 has not caused unemployment
5. Family Tax Credits
Graded benefits for those in work. It leads to lower tax bills and is graded to avoid any disincentives of working harder.
6. Make it harder to get sickness and disability to benefits.
It is argued that many people who are on sickness and disability benefits would be able to do some types of jobs. In some cases, sickness benefit has been seen as an alternative to being on unemployment benefit. But, because it is attractive to remain on sickness benefit there is a disincentive to work.
It is a difficult situation, with a conflict between the need to give workers the proper incentives and the importance of avoiding unfair treatment of the low paid.
In an economy with perfect equality, noted by a Gini coefficient of 0, 20% of the population would hold 20% of the wealth. As the percentage of the population in consideration rises, so do the amount of wealth held, with a one for one increase.
In a perfectly inequality curve, the Gini coefficient is 1, and the curve represents 100% of a nation's wealth being held by one single person or entity.
More commonly, Lorenz curves bring out information showing some level of inequality, such as 50% of the population only holding 35% of the wealth. The greater the disparity within a nation, the closer the Gini coefficient will be toward 1.
The Lorenz curve and Gini coefficient are popular in economics because they allow for negative wealth. If a certain portion of the population has negative wealth, the Lorenz curve can move below the x-axis.
Though this can provide valuable information, it should be used in conjunction with other information and models. It cannot demonstrate the cause of the negative wealth, which may be relevant to the overall economic analysis.
The Gini index is a measurement of the income distribution of a country's residents. This number, which ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality. It is typically expressed as a percentage, referred to as the Gini coefficient.
BREAKING DOWN 'Gini Index'
The Gini coefficient is an important figure for the analysis of relative poverty within a country or region, but it should not be mistaken for a measurement of wealth. A wealthy country and a poor country can have the same Gini coefficient, as long as they have similar income distributions.
Graphical Representation
The Gini coefficient is often represented graphically as the area between the Lorenz curve and a line of equality. The Lorenz curve is also a graphical representation of income distribution, plotting cumulative income shares relative to cumulative population shares.
For example, the chart would could show that the poorest 80% of the population takes in 50% of total income. The Lorenz curve and Gini coefficient can also be altered to reflect wealth rather than income, though wealth is often more difficult to measure than income.
The government's ESD working groups have argued that, unless substantial change occurs, the present generation may not be able to pass on an equivalent stock of environmental goods to the next generation. This would be due to three factors:
The other way is to view the environment as offering more than just economic potential that cannot be replaced by man-made wealth and to argue that future generations should not inherit a degraded environment, no matter how many extra sources of wealth are available to them. This is referred to as 'strong sustainability'.