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3.6 Distribution of Income

3.6 Distribution of Income. Use of Taxes. Fund spending Steer economy (fiscal policy) Discourage negative externalities Influence “fair” distribution of resources Transfer payments Services in kind. A Good Tax. Adam Smith 1. Certainty 2. Convenience

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3.6 Distribution of Income

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  1. 3.6 Distribution of Income

  2. Use of Taxes • Fund spending • Steer economy (fiscal policy) • Discourage negative externalities • Influence “fair” distribution of resources • Transfer payments • Services in kind

  3. A Good Tax • Adam Smith • 1. Certainty • 2. Convenience • 3. Economy (cost efficient to collect) • 4. Equity (equally felt by those who pay)

  4. Equity (very normative) • Horizontal • Treating equals equal • Vertical • treating different people differently • To enhance fairness

  5. Direct Taxation • Taxes directly paid from taxpayer to tax office • Redistribution effect (to less fortunate) • Transfer payments, healthcare, education • Disincentive effect • Rich produce less • Poor work less (Poverty Trap) • Better to collect benefits • Black Market for Labour • High taxes increase tax avoidance

  6. Indirect Taxation • Tax on economic exchanges (not individuals) • Consumption taxes • Value Added Tax • Gas, alcohol • Shifts Supply curve left • Decreases externalities

  7. Progressive Taxation • Higher income = higher percentage of tax paid. Marginal Tax Rate Tax rate on last money earned. (above minimum tax rate)

  8. Issues and Arguements • What is the fairest form of taxation? • Under-consumption • Taxes provide underprovided services • Inefficiencies of Redistribution • How much is lost in bureaucratic inefficiency? • Economic Growth vs. Economic Equity

  9. Proportional Tax Rate • Same tax as a proportion of income • Rich= 15% • Poor=15%

  10. Regressive Tax • Ave. tax falls with rise in income • Flat rate paid by all. • Sales Tax • Consumption Tax

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