Distribution of Income
The fifth macroeconomical goals to ensure that income distribution is equitable. Equitable means fair, but fairness is an elusive concept and it means different things to different people. •
A more equitable distribution may help to accelerate growth and promote human and economic development in many ways: •
The propensity to consume of the poor is higher than that of the rich so redistribution will increase aggregate demand especially for basic goods and services. •
Social tensions are lower and thus governments can more easily undertake important economic reforms which require a high degree of consensus within the population. If people feel that they enjoy the fruits of economic growth then they will be willing to work harder and sacrifice more now in order for them or their children to enjoy more at a later date. They will be willing and able to save more, permitting higher rates of investment and thus growth. Fewer social tensions decrease uncertainty and risks for domestic and foreign investors. •
The very poor will be able to afford access to crucial resources such as education so the amount and quality of productive resources available to a country increases. •
Trust increases among the population so the cost of economic transactions decreases. More economic activity will take place thus accelerating growth. •
However, an excessively equal income distribution could lower economic efficiency. It could lower the incentives for hard work and for risk taking. Growth may be undermined.
Direct and indirect taxes
Direct taxes are taxes on incomes, on profits and on wealth. The burden of a direct tax cannot be shifted onto another entity.
Indirect taxes include taxes on goods and on expenditures. The burden of an indirect tax can be shifted onto a different entity.
Progressive, proportional and regressive taxation
The marginal tax rate is the percentage taken by the government on the last pound earned. It is the extra...
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