Studies prove – PI can effectively reduce poverty and inequality.

The first study by Atkinson et al. (2017) simulates the effects of three budget-neutral policy reform scenarios of which Scenario 1 is a progressive tax (with three rates: 25%, 35-55% and 65%) combined with universal child benefits (18% of median equivalent household income or 0.3 equivalent factor for each child) and more generous social insurance benefits (raising unemployment with 50% and pension benefits with 25%). Scenario 2 is a combination of a PI scheme with a progressive-tax and universal child allowances. Finally, Scenario 3 simulated a rise in the minimum wage up to the Living Wage level in 2014 for the UK (48% of the median minimum wage of fulltime employees). This third scenario is taken alone or together with the two reform packages. The baseline is the current social security system in which over time means tested minimum benefits increasingly have displaced social insurance schemes providing a replacement income notably in the UK for older people. The policy reforms are aimed at providing an alternative to current policies. The authors used the static simulation model of EUROMOD to simulate the effects on incomes by deciles and on inequality and poverty. They simulated equivalent household incomes for 2014 using data from the Family Resources Survey 2009/10 containing 25,200 households and 57,380 persons. For poverty, the 60% of mean equivalent household income threshold is applied to calculate the poverty head count and the poverty gap. For inequality, measures as Gini, Atkinson’s inequality measure (inequality aversion at 0.5), the mean log deviation (MLD) and Theil’s entropy measure were used. The findings show for both scenarios and according to all measures, that inequality and poverty was substantially reduced, but more in the second PI than in the first SI scenario. Also, the poverty gap was reduced with -20% and -60% respectively. The children’s poverty gap was even reduced with -80% in the PI scenario. With respect to income gains and losses by decile and according to both PI and SI reforms, deciles 1-7 gain, decile 8 shows stability and deciles 9 and 10 loose. The poorest decile gains with 16% in the SI and with 50% in the PI scenario. More than three quarters of the oldest households over 65 gain in the SI, but only one in ten in the PI scenario. The impact of the third minimum wage reform on inequality and poverty appeared to be modest, it affects 22% of the households who experience some income gain while it reduces Gini and the poverty headcount with less than 0.5pp compared to the baseline. The reason is that low wages are spread over a large part of the household income distribution and that part of the income gain due to raising the minimum wage is withdrawn from the means-tested minimum benefits. Because women are more likely to be in low pay, the reduction is even less for them. The effects of the SI and PI reforms on taxes and therewith on work incentives are complicated, they seem to raise the marginal effective tax rates and therewith reducing incentives notably in the PI reform, whereas the participation tax rates in the PI reform are less affected. By comparing the SI and PI reforms, some insight is obtained on the different effects of the reforms on inequality and poverty but not on the effects of each of the different components (child benefits, SI benefit increase, PI and tax increase), of the reforms separately.