Policies to Reduce Poverty and Inequality

Direct Taxes (AO3)

Direct taxes are imposed on income rather than expenditure (indirect). There are 3 types the syllabus want you to know:

• Personal income taxes

• Corporate income taxes

• Wealth taxes: Taxes belongings such as houses or capital gains (when you cash out from stocks). This affects rich people more (because they own a lot).

Direct taxes are relatively fair ways to redistribute wealth, but overtaxing will lead to households and firms avoiding taxes, and disincentivize hard work.

Indirect Taxes (AO3)

• Indirect taxes are imposed on expenditure, such as a tax on groceries. It can be effective as it is harder to avoid, and wealthier people may spend more, generating more tax revenue. 

• However, it will affect poor people more, as they will need the same amount of groceries as a rich person, thereby paying the same amount of tax, which is hard when you have little money to go by. 

Further Policies to Reduce Poverty and Income and Wealth Inequality (AO3)

• Reduce inequalities of opportunities/investment in human capital: Ensure everyone has the same access to education

• Transfer payments: Give out money or other resources (food banks) to people that need it

• Targeted spending on goods and services: The government could invest in education or healthcare to increase their quality, decreasing inequalities in opportunities and quality-of-life

• Universal Basic Income (UBI): Give everyone a guaranteed monthly income. While this would eradicate poverty, it would raise inflation as everyone can afford things, and potentially increase government debt by a lot. It is therefore not implemented in any countries.

• Policies to reduce discrimination: Make laws against discriminating and actively enforce these laws. However, it is sometimes hard to prove whether or not someone didn't get a job because of their race. 

• Minimum wages: Establish a minimum amount of money an employer has to pay people. This gets rid of very low-paying jobs, but will raise labor costs, decreasing Aggregate Supply.