There are those who point out that using benefits level to define poverty has the perverse effect of increasing poverty when benefits are raised whilst reducing poverty when benefits are lowered. Also another significant indicator to consider is the comparison to our previous ancestors where relative to them today we all enjoy a relatively high standard of living.
Relative poverty is most commonly defined in terms of poverty relative to the average in the society of the day.
(b) In recent years the distributions of income as become more unequal. The widening of the gap between those with high incomes and those with low incomes was particularly noticeable between 1980 and 1990.
There were a number of reasons for this rise in income equality. One was the cut in the top tax rates, which, of course, benefited the rich most. Another was the rise in top executive pay, which was sparked initially by privatisation. At the other end of the income range there was a decrease in the real value of benefits, particularly job seekers allowance, and a rise in the number of lone parents. The percentage of families with dependant children that are headed by lone parents more than doubled between 1971 and 1996. The lack of support in bringing up the children means lone parents are often not in work or only in part-time jobs.
Since 1979, this trend has been growing. In 1980 the poorest 10 percent of the population saw their annual incomes after housing costs haven been taken into account fall by nearly 20 percent. In contrast, average incomes after housing costs have been taken into account fall by nearly 20 percent. In contrast, average incomes after housing costs rose by around 35 percent whilst the top ten percent increased their incomes 61 percent. The majority of the population over the period received an increase in income, which was below the average, whilst the top 30 percent received increases above the average.
Since 1979 the government has limited increases in state benefits, the most important source of income to the bottom 20 percent of income earners. Broadly, benefits have not been increased in real terms at all, whilst some benefit rates have been cut or even abolished. In contrast, income tax rates have fallen. The cuts in income tax have mainly benefited high-income earners who pay higher rates of tax.
The fall in demand for unskilled labour in an economy, which is becoming more and more capital intensive, is a significant reason for wage inequalities to widen. In 1994, the real income wage rate for men in the bottom tenth of the earnings league was lower than their 1975 level. In contrast, the wages of the top 10 percent had increased by over 50 percent of the same period.
The decrease in trade union power, which previously helped lift the wages of the low
paid, and the increased internationalisation of the UK economy which puts unskilled labour in direct competition with unskilled labour in the third world.
(c) Taxation is a way in which governments affect the distribution of income and wealth. In the UK the overall effect of the tax system is to reduce inequality. This method involves the wealthy and people with high incomes being taxed more than the lower wage rate earners. The banding system is a progressive tax, which aims to make income distribution more equal. Regressive taxes for example VAT, which take a higher percentage of the income of the poor make the distribution more unequal. Regressive taxes don’t take into account annual income.
Manipulating tax on incomes can help the lower wage rate earners by the government abolishing bottom rates of income tax.
The poverty trap arises when the poor find it difficult to raise their disposable incomes because any rise in gross income results in them having to pay more in taxes and receiving fewer benefits.
This aims to reduce the extent of poverty trap by providing a greater incentive for people to work. It also keeps people in employment and not claiming social benefits, which cost the government millions in revenue. It is in the government’s interest to reduce inequality of income distribution as they gain most of their revenue from taxes.
Operating a national minimum wage. If set above the equilibrium rate this will help the low paid who stay in employment. However, there are disputes about the effect that such a measure may have on the employment of unskilled workers. Also, as mentioned above, not all the low paid are poor and not all the poor are in low paid jobs.
If the economy is in recession then the government will increase public and social spending to help close the poverty trap between the lowest earning 10% of the Uk.
