Income distribution and redistribution Trying to make an unfair world a little bit more fair…..
Feb 24, 2016
Income distribution and redistribution
Trying to make an unfair world a little bit more fair…..
Remember the big 3 economic
questions?
So what decides who receives the majority of
income and output in a market economy? What are the determining factors?
For whom to produce?
Selling those factors
of production
As we all know, there is a huge
disparity among owners of the factors of production. Some people have special talents and are highly
educated, some people do not. Many critics of the market economy use this as an argument against it….
Market economy reality
So what if anything is
government to do?
Government typically chooses from among
four policies to try and correct the issue of income redistribution. Can we name
them……?
The Big 4
The distribution of income from
the haves to the have nots (vulnerable groups). Let’s all shout out without raising our
hands some examples of recipients of transfer payments
and types of transfer payments….
#1--Transfer Payments
Transfers
Recipients Old folks Sick folks Poor folks Kids of poor folks Unemployed folks
Examples Pensions Unemployment
benefits Housing benefits Child allowances Maternity benefits
and more….
Accepting the reality of unequal
income distribution, it would not be surprising to see many of the less
fortunate in society unable to receive the benefits of certain merit
goods. Merit goods are goods that……..
#2—Subsidized provision of merit goods
Merit goods have spillover benefits but
often can’t be purchased by poor people.
Considered basic human rights nowadays, with unequal distribution of
income, too many people would not receive these goods, thus causing
significant problems for society as a whole.
Merit Goods
Government must make sure not only to provide education and healthcare but
to make them affordable too. Some governments provide free universal
healthcare and education, while others have not gone as far…..perhaps they
should…
Government’s role
Thank-you government for:
Clean Water Sanitation Sewerage
Other subsidized merit goods
Subsidize merit goods to ensure that
the quantity provided increases
Government’s role
Government will often intervene in
markets to benefit certain groups. Examples include:
Minimum wage legislation Price supports for farmers
Subsidies to firms
#3—Government intervention in markets
#4--Taxation
Tax revenue allows for the
provision of transfer payments and the subsiding of merit goods. Tax policies on their own also allow for
redistribution of income, but decisions must be made….
Taxation
Yet they allow government to do many
important things, such as: Provide public transport
Provide transfer payments/merit goods Correct negative externalities
Pursue fiscal policy when needed And many, many more…
Everybody hates taxes!
Two types of taxes
These taxes are paid directly by the consumer to the government. Examples
include: Personal income tax Corporate income tax
Wealth tax (on property, inheritances) Earmarked taxes (to support programs like
unemployment insurance, social security and healthcare)
Direct taxes
These taxes are usually placed on the
supplier or seller of a good/service, but the consumer will have to incur some incidence of this tax. There are three main categories we will discuss……
Indirect Taxes
These are taxes on various goods and
services paid at the time of purchase. In the U.S.A., many states put a fixed
percentage tax on goods purchased. Other countries use a value added tax,
which taxes each stage of the production process for the value that is
added.
General Expenditure Taxes (Sales taxes)
These are taxes placed on goods that
the government wants to discourage consumption of. The level of incidence of the tax for the consumer depends on
the elasticity of demand of the consumer for the particular product.
Excise taxes (Sin taxes)
These are taxes placed on imported
goods. They serve the purpose of protecting domestic industries and at the same time raising revenues. They
tend to be much less a part of government policy in MDCs than they
are in LDCs
Tariffs (Customs duties)
Most human beings with a heart can
come to terms with the idea that the more income you earn the more you
should contribute in taxes. Unfortunately, the question is more complicated than should the wealth pay
more, but how much more should they pay?
The ability to pay principle
Tax Flavours
Taxes are usually defined as being either:
Proportional Progressive Regressive
This depends on the relationship between income and the fraction of income paid as
tax…sound confusing? It’s not really….
Tax Flavours
As income increases, the fraction of income paid as taxes remains constant. Joe makes $10,000 a year and his tax
rate is 15%. Warren makes $10,000,000,000,000 a year, and his
tax rate is 15%. Warren obviously pays more in taxes, but the tax rate is the same. Seem fair?
Proportional Tax
As income increases, the fraction of income paid as taxes remains increases.
Joe makes $10,000 a year and his tax rate is 15%. Joel makes $20,000 a year, and
his tax rate is 20%. Joel earns more therefore pays more in
taxes. This is a mildly progressive tax, a strongly progressive tax would be higher
for Joel. Seem fair?
Proportional Tax
As income increases, the fraction of
income paid as taxes decreases. Joe makes $10,000 a year and his tax
rate is 15%. Bill makes $20,000 a year and his rate is 10%.
Bill still pays a larger dollar amount in this example than Joe, but his % is
lower. Seem fair?
Regressive tax
The more progressive a tax system is, the more equal the after-tax distribution of income will be compared to the pre-
tax distribution of income. However, this alone does not remove
the controversy surrounding the tax issue
General Conclusion
As you can probably guess, people with
high incomes are not happy to see a highly progressive tax system.
They argue that they worked hard to achieve what they have, and shouldn’t
be forced to pay a higher rate to support the lower income classes.
Is this a fair point?
Controversy over taxes
Do high taxes reduce the
incentives of the rich to work and save?
Additional questions to ponder
Do taxes worsen the allocation of
resources (create allocative efficiency) ?
Do high taxes encourage tax evasion?
Additional questions to ponder
Is there a trade-off between income
equality and efficiency?
If we create more income equality, will economic growth be sacrificed?
Additional questions to ponder
Might there be a conflict between using
taxes as a fiscal policy tool and as an income redistribution tool?
Do transfer payments reduce the incentives of the poor to work and
save?
Additional questions to ponder