Government policies to reduce Poverty and Inequity

• What policies can help to address income inequality and poverty?

  • removing protectionism or engaging in expansionary demand and supply side policies
  • national minimum wage
  • state benefit e.g unemployment + pension
  • progressive tax system
  • inheritance tax
• What is protectionism?

  government policies which restrict international trade in order to protect domestic industries e.g by tariffs
• What is the impact of removing protectionism on the poverty cycle?

  Higher growth → higher wages → better education/healthcare → better human capital → better productivity → higher income

  However, negative externalities may be generated e.g pollution from increased transport of goods which can decrease living standards
• How can investing in supply side policies help with poverty and income inequality?

   increases the potential output of the country (shifts the production possibility frontier outwards)

  Higher education/skill levels → higher human capital → increased productivity → higher output → higher income
• What are state benefits?

  • State benefits are usually given to the poorest and most vulnerable people in society
  • State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc.
• How does a progressive tax system help with income inequality?

  closes the gap as higher levels of income tax to higher levels of income i.e lower income earners pay a lower tax rate than higher income earners

  • Tax revenue collected is then redistributed to those who need it most
  • this allows for better provision of merit and public goods like education and healthcare which can benefit poorer households
• What can eradicate the benefits of a progressive tax system?

  multiple regressive (indirect) taxes
• How do national minimum wages help income inequality?

  • National minimum wages are set above the free market rate
  • Firms are not allowed to pay anyone less than the legal rate
  • This raises the level of income in poorer households
  • more useful in monopsonies than perfectly competitive markets where the wage is set very low to maximise profits
• what are the consequences of an NMW?

  unemployment /excess supply of workers as firms don't want their cost of production to increase
• Why are progressive taxes bad for high income workers?

  they have to pay more taxes meaning that it is a disincentive to work. They may work in lower income brackets or do tax avoidance causing a fall in tax revenue
• When is hard to sustain state benefits and NMWs?

  In times of increasing inflation