Poverty & Equity

Absolute Poverty:

“A condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services”

For the consideration of poverty many countries adopt a national poverty line which considers the income needed to satisfy minimum needs. The World Bank consider extreme poverty to be living on less than $1.25 a day and moderate poverty as living on less than $2 a day.

Relative Poverty:

Relative poverty takes into consideration the income of an individual or household and compares it to the median income of that economy. In relation to the Lorenz curve if there was perfect income equality there would be no relative poverty. In this case they still have enough money to survive, and it is more based around the cultural environment.

Causes of Poverty

There are many causes of poverty; some apply more to certain countries than others

  • Low Wages/Income
  • Unemployment

The individual will have no income, and in countries where there is no welfare system they will struggle to survive.

  • Lack of Human Capital

This is where the individual lacks training or education to get a job, or if their health is at a state where they cannot be productive. This is the case in my countries in Africa as there is shortage of education and health.

  • Geography

Certain areas have less job opportunities, but the people cannot afford to move. There may only be low paying jobs which have adverse effects on health in the given area.

  • Age

In a country with no benefits and no welfare system anyone of old age will struggle to survive unless they have children supporting them

  • Shortage of Merit & Public Goods

This is a lack of education, no housing available, no healthcare, bad living conditions. Etc.

  • War

Has adverse effects on human capital, government, job opportunity, and geography

This can lead into a poverty cycle; it is extremely difficult to break out off. In most places where there is extreme poverty and absolute poverty it is a combination of causes which means that the entire system needs to be rebooted.

Consequences of Poverty

There are many consequences of poverty, as it affects many aspects of life.

  • Low living standards

This may mean that those suffering from poverty may not have access to suitable housing, clean water, or basic food items. This usually results in increased disease and infection

  • Lack of Access to Healthcare (high rates of preventable diseases)

Many people suffer as a result of low living standards and there may not be a healthcare system available. Any healthcare that is offered may come at a considerable expense which they cannot afford.

  • Lack of Access to Education

There are no available institutions for education, making it difficult to break out off the poverty cycle

  • Social Problems

Crime, Violence, Family Breakdown, etc.

  • High rates of infant mortality

The Role of Taxation in Promoting Equity

Direct Tax: Income, Corporation, Capital Gains, National Insurance, Inheritance, etc.

Indirect Tax: Excise (fuel, cigarettes, and alcohol), VAT (Value Added Tax), Sales Tax, Tariffs, etc.

Direct tax is usually a tool used in order to redistribute income, whereas indirect tax is usually used to solve negative externalities related with the consumption of certain products. Indirect taxes are avoidable as they are taxes on consumption.

Proportional Taxation:

This is taxation where it remains at a fixed rate, so it does not depend on income. Therefore it will not change if there an increase or decrease in income.

Progressive Taxation:

This is where the rate of taxation depends on a change in income. So if income were to increase of an individual so would the tax paid. If a tax system is very progressive then the equality in income distribution after taxes is greater. (Suits Index)

Regressive Taxation:

This is the case where the tax rate decreases as the amount subject to taxation increases. This type of tax is more of a burden with those on a lower income, as a result of income elasticity of demand of staple items.

Other Measures to Promote Equity

The provision of public and merit goods by the government, this is in order to supply these to people with a low income who otherwise would not be able to afford it.

The government would do this through the direct provision of these goods, or create subsidies which would make it more affordable for those on lower incomes.

For example this can be the provision of health care services, education institutions. This can also involve the provision of infrastructure that would enable suitable housing (e.g. council houses), clean water supply, access to food (food stamps), and general sanitation.

Without government provisions of these goods it would be under-consumed due to poverty and low income in a free market.

Transfer Payments

This would be the direct redistribution of income to individuals by the government, it is to take money away from certain groups and bring it towards other groups.  This is done in the case of the elderly where they cannot work, so the income produced by those working goes to assisting people in need. In this example it would take the form of old age pension.

There are various other examples of this such as unemployment benefit, child allowances, war veteran benefits, student grants, disability benefits, maternity benefits, and housing benefits, and fuel allowances.

The Relationship between Equity and Efficiency

Government policies to promote equity may have positive and negative effects on the efficiency in the allocation of resources, and growth.

For example the pursuit of high income tax will disincentive high income earner to work, and may encourage them to save their money or to move their money out of the country.

Indirect taxes as a result of their regressive nature will have a negative effect on the distribution of income. But there is also the factor that they are placed to reduce negative externalities which conflicts with the allocation of resources in regards to benefitting the economy.

There can be a trade-off between income equity/equality and efficiency as you this involves direct intervention in the economy which may affect price mechanisms and market forces.

Government expenditure tends to be a restraint on the overall budget. But there is also the factor that government intervention even though the intention may be good may not result in greater equity, and only achieve allocative inefficiency and misallocation of resources.

When there is considerable income inequality it discourages labour as they may have to work harder to receive the same wage, and this leads to less productivity. Furthermore, transfer payments may reduce allocative efficiency as it may discourage people from seeking work. But there is also the argument the vulnerable groups’ still need protection.

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