Eliminating povertyby Stephen Nickell / April 27, 2010 / Leave a comment
Published in May 2010 issue of Prospect Magazine
For a rich economy, Britain has high rates of relative poverty. A household is in poverty if its income, corrected for its composition, is less than 60 per cent of median income. Of British households headed by someone of working age, a little over 20 per cent are in poverty—much greater than the rate in Sweden, for instance.
The problem is the large body of working-age Britons with very low skills. This group is around 23 per cent of the working-age population, more than twice as many as in Sweden. Given the kind of market-based economy that we live in, it is difficult for those with very low skills to earn a wage which will lift their households out of poverty. Furthermore, the very low skilled are much more likely to be out of work.
So how could we eliminate poverty? In the long term, we should provide higher levels of skill to all. In the short term, the obvious answer is to tax the wealthier households heavily and then to give the poor households enough money to lift them out of poverty. Before doing this, we might note that a massive rise in the minimum wage is no solution because it would generate a significant reduction in the available unskilled work. And absence of work is as much a cause of poverty as low pay.
There are two key problems with the policy of taxing the non-poor and subsidising the poor. First, we need to retain the incentive to work. The existing tax credit system, where benefits are provided to those who continue to work, was a move in this direction. But it is nowhere near generous enough to eliminate poverty. If it is made more generous then, to ensure that individuals do not lose out too badly as they start earning more, most of the working population will end up eligible for some kind of tax credit.
Second, the tax requirements to fund the system would be enormous. Sweden has gone a long way towards eliminating poverty but, in order to do so, they have much higher taxes than Britain. And, as we have a much larger…