Is the use of tax and benefits system the best method of reducing

poverty or are alternative methods more effective

The use of tax, defined as a compulsory contribution to the governments
receipts, and the benefits system, where those on lower incomes are given
payments in which they can use to better their lifes, is widely used by many
countries around the world to help reduce the number of people living in poverty.
But other methods can be used. Such as the increasing of the minimum wage or
supply side policies to improve education or to help increase the number of jobs
in the economy.
Governments can intervene to promote equity, and reduce inequality and
poverty, through the tax and benefits system. This means employing a
progressive tax and benefits system, which takes proportionately more tax from
those on higher levels of income, and redistributes welfare benefits to those on
lower incomes. The use of taxing higher income earners helps to reduce the
market failure known as wealth inequality, as well as helping people out of
poverty, with further long term effects of keeping the future generation out of
poverty. The more those who are taxed helps to reduce the gap between the rich
and the poor which can be seen in the poverty trap diagram below.

Those who are stuck in the poverty trap cannot earn any more money without
losing their benefits so if this benefits ceiling was decreased further due the
lessening of taxes on high income earners, then those who are stuck in the trap
can begin to earn more money and take jobs that provide them with a larger pay
packet, due to their benefits being less. This money kept by the higher income
earners can be kept by higher income earners. Then due to trickledown theory
higher income earners will spend this money in the economy causing an increase
in aggregate demand. According to the trickle-down theory, if tax rates are
lower, people have an incentive to work more because they get to keep more of
the income they earn. They then spend or invest that income, and either of these
activities will improve everyones prosperity, not just the prosperity of those in
the highest income tax brackets. Furthermore, in the end, the government may
actually collect more income tax despite the lower tax rates because of the
additional work performed. This can then be spent on education prospects or
supply side policies shown in my thirds point.

Then due to higher income earners having

more money they can spend more as their
disposable income is more increasing aggregate
demand then this increases due to the multiplier
effect the overall increase in economic growth
will be greater than the injection in demand
which would help to increase employment in the
economy. Therefore the wealth left by not
having higher income tax rates would
eventually reach the lower income earners and
help to lift families out of poverty helping to
reduce overall relative poverty in the UK. Also lower tax rates on other areas of
the economy such as cooperation tax will have positive macroeconomic effects
such as increased investment in the economy. As firms will be making a higher
profits due to less being directed as receipts towards to government to be used
as welfare payments. And in todays economic climate for a sustainable recovery
from the 2008 financial crisis, investment is essential to bring us out of the
troubles of 2008. So the low percentage of income tax and cooperate tax for
higher earners, this will help lower income earners out of relative poverty.
Although on the other hand this policy is extremely debatable. High income
earners have a large chance of saving. Therefore, the increased disposable
income from a tax cuts does not filter into other sections of the economy
because it is saved not spent. Also as well as this, the increase in income for all,
even if this is true, does not address the problem of wealth inequality and in
some ways could even increase the problem. As not all the money saved from
decreased income tax is spent, some is obviously saved, thus increasing
inequality of wealth.
On the other hand, the government could increase the national minimum wage.
This is an effective way of increasing the incomes of those in poverty, and
therefore reducing wage inequality. As well as providing an incentive for those in
the poverty trap to begin looking for a job again, as they may be earning more
when there benefits are taken away. The extra money gained from the
introduction of the minimum wage can help those in poverty to earn more and be
released from relative poverty, as they will be earning more than 60% of the
median wage in the UK. Although some say today that the minimum wage would
still not be enough for some areas of the country as prices are different in
different regions of the UK, there should be a living wage instead. Known as
price discrimination, areas of London for example will be more expensive than
areas such as Manchester. So those who live in these regions, even with the
increase in the minimum wage, will not be able to escape poverty. Even though
by definition they may not be in poverty but literally they will be. Although a
macroeconomic problem is that it may cause unemployment because firms may
not be able to afford the workers. So will be forced due to labor costs to reduce
the amount of people they employ in order to help make a profit. If it does cause
unemployment, poverty could worsen. And therefore again if employment
reduces, the UKs aggregate demand will decrease as the people let go by the
firm will have less disposable income to spend in the economy, and may save
more reducing the amount of money in the circular flow of income. Defined as
the total planned expenditure in the economy, a decrease in AD will cause the
UKs growth and inflation to decrease. And in a current world of rock bottom oil

prices as well as the crisis in the EU inflation cannot afford to decrease further
back into last months -0.1%.
The decrease in employment, causing a reduction in disposable income, which
means a reduction in consumer spending meaning a reduction therefore in AD as
AD equals. C+G+I+(X-M) C being consumer spending. This then causes a new
equilibrium point of E1 and results in a lower inflation level of P2, and a lower
growth figure of Q2.
Lastly the government could implement supply side policies to help economic
growth of the country helping to create more jobs in the economy. This then
would allow for more employment opportunities in the future as the overall
countries income is growing,
allowing for more firms to
open and in a stable
economy invest and increase
employment opportunities
helping to reduce poverty as
more jobs are available to
those who need them.
This policy would be
done by increasing the
long range aggregate
supply curve of the
economy. A recent
example of would be
the introduction of the
HS2 railway. The
increase in the
consecutiveness of the
nation allows those in
areas such as
Birmingham to access
London in a small
amount of time. This
makes it easier for
firms to interact and
coordinate activities across city boundaries. Making them more productive. This
then opens up opportunities for integration as well as specialisation of firms in
each city helping to promote the growth of firms, leading to economic growth of
the UK. This can be seen in the diagram below. Also jobs are created simply by
undergoing such a large supply side policy. These jobs could go to people living
in poverty helping them to be pulled out of the poverty trap.
Productivity of firms have increased as they are able to access other businesses
in other areas of the country due to increased connectivity. This then causes the
countries long range aggregate supply curve to increase.
Although these policies take a huge amount of time to complete and the effects
are very theoretical. Firms may not use the railway as a way of increasing
productivity, as well as the project taking up to 2026 at the latest. And by this
time poverty may of got worse in the UK. Also due to the poverty trap, shown in

my first paragraph, even if there are more jobs in the economy, those in poverty
on benefits are unlikely to accept work as they will be worse off. There seems to
be the only way to make the situation better is to make things worse off first.
Which many families in poverty cannot afford to do. So overall this policy would
not work without cooperation from my first point. And with the benefits system in
full change to universal credit, only accessible from computers which many
families in poverty do not have, there seems to be a slim chance the two will now
work together.
To conclude I see the use of the tax and benefits system combined with supply
side policies the best method for reducing poverty in the UK. This is due to the
fact that the need to decrease benefits to force people out of poverty, by forcing
them to get a job. Also the money saved from not having large tax bands for
high income earners, allows the government to receive higher receipts, as there
is a much higher number of people in work. This money saved can either be used
to tackle the huge budget deficit, or be used to help support the supply side
polices implemented in my third point. Both these policies working together
allows for lower income earners, stuck in the poverty trap, to be forced out of the
trap and to get a job which would provide more income. Thus allowing them to
be withdrawn from relative poverty, with the added benefit of the
macroeconomic objective of increasing the employment rate of the UK.