DISTRIBUTION OF DISTRIBUTION OF INCOMEINCOME

GOVERNMENT CAN GOVERNMENT CAN REDISTRIBUTE INCOME IN 3 REDISTRIBUTE INCOME IN 3

BASIC WAYS:BASIC WAYS:

TAXATIONTAXATION TRANSFER PAYMENTSTRANSFER PAYMENTS GOODS AND SERVICES IN KINDGOODS AND SERVICES IN KIND

EQUITYEQUITY

HORIZONTAL:HORIZONTAL:

Two people having the Two people having the same income should same income should pay the same tax.pay the same tax.

VERTICAL:VERTICAL:

Less tax would be paid Less tax would be paid by low income by low income earners and more earners and more taxes would be paid taxes would be paid by high income by high income households.households.

TYPES OF TAXESTYPES OF TAXES

DIRECT TAXATION:DIRECT TAXATION:

Are the taxes that are levied on the income Are the taxes that are levied on the income and resources of individuals and and resources of individuals and organizations. Normally they are levied on organizations. Normally they are levied on wealth or income throughout income tax, wealth or income throughout income tax, corporate tax, capital gains, inheritance corporate tax, capital gains, inheritance tax, etc.tax, etc.

INDIRECT TAXES:INDIRECT TAXES:

Are charged on goods and services Are charged on goods and services produced, imported or exported. produced, imported or exported.

Ex: Sales tax, value added tax (VAT), or Ex: Sales tax, value added tax (VAT), or Goods and Services Tax (GST).Goods and Services Tax (GST).

REGRESSIVE, PROGRESSIVE REGRESSIVE, PROGRESSIVE AND PROPORTIONAL TAXESAND PROPORTIONAL TAXES

Regressive: Is a tax which takes a higher Regressive: Is a tax which takes a higher percentage of income from people whose percentage of income from people whose income is low. It places proportionately more of income is low. It places proportionately more of a burden on those with lower incomes.a burden on those with lower incomes.

Progressive: Tax imposed so that the tax rate Progressive: Tax imposed so that the tax rate increases as the amount to which the rates increases as the amount to which the rates applied increases. (Normally referred as income applied increases. (Normally referred as income taxes. People with more income pay a higher taxes. People with more income pay a higher percentage of that income tax than those with percentage of that income tax than those with less income).less income).

Proportional: Percentage of tax is unchanged at Proportional: Percentage of tax is unchanged at higher income levels. higher income levels.

TaxesTaxes

INCOME (Y)

Tax

Pay

men

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Transfer PaymentsTransfer Payments

Pension PaymentsPension Payments Welfare paymentsWelfare payments Unemployment benefitsUnemployment benefits Housing subsidiesHousing subsidies Subsidies to corporations to lower costs.Subsidies to corporations to lower costs.

Non Cash / Indirect PaymentsNon Cash / Indirect Payments Merit GoodsMerit Goods EducationEducation HealthHealth Roads, etcRoads, etc