Distribution of Income

In a free market economy there will be unequal distribution of income. The situation in Brazil: ten percent earn more than half of the income, while ten percent of the Brazilians do not even get one percent.

Taxes "'In this world nothing can be said to be certain, except death and taxes.” The Works of Benjamin Franklin, 1817 However not all taxes are used to redistribute the income of the country more equally. Taxes may be used to reduce the consumption of goods that create negative externalities. Taxes on imported goods (tariffs) may be imposed to reduce the consumption of imported goods. Taxes may be raised or lowered to manage the level of aggregate demand in the economy.

Direct Taxes Direct taxes are taxes imposed on peoples’ income or wealth, and on firms’ profits. This can include income from a job, interest from savings, stocks and bonds and dividends. These taxes will always be paid because “the law” requires an individual and companies to disclose their full earnings.

2 effects of direct taxes Redistribution effect – the taxes are collected and distributed to members in the community in need, as well as providing benefits for the general public (roads, schools etc) Disincentive effect – if taxes increase because the workers are earning more than they may choose not to work more hours. Also a unemployed person may loss varouse benefits given to unemployed, and may have less disposable income.

Indirect Taxes Indirect taxes are also known as expenditure taxes, or consumption- based taxes (VAT tax) In this case, consumers who buy the goods pay the tax to the seller, or producer, who then pays the tax to the government. (Alcohol and cigarettes consumers usually get hammered) Governments usually have a higher rate of indirect taxes on good deemed luxury goods. Taxes can be avoided, the consumer can choose not to consume the product or service.

There is a debate as to how much a tax should be on a good that produced negative externalities. Road taxes usually cover more that the upkeep of the roads in a country – but it also offsets the negative externalities of pollution and congestion, and perhaps pays for public transportation.

Progressive taxes Used by many countries to redistributed some of the income of the wealthy to the low income earners. Progressive tax means that as incomes rise, people pay a higher proportion of this income in taxes. Usually, there is a certain amount of income that is non- taxed, so a person earning a low income might pay no taxes at all. However, when the income moves beyond this minimum, then a certain percentage of the income will have to be paid to the government. Then, as income rises further, a progressive tax would take larger percentages at higher incomes.

Not so easy It is important to observe that the example given in the table represents a vastly simplified tax structure In reality most countries Tax structures are infinitely more complicated. The biggest complication comes in the form of tax deductions’ and the calculation of “taxable” income. Tax deductions allow people to reduce their “taxable income” as a result of spending on certain things. Deductions include – medical, mortgage, training etc.

Proportional tax “flat tax” The percentage of taxes that is paid is consistent regardless of the level on the income earned. The main advantage is that it makes complicated tax laws not as complicated The second reason is that workers and corporations can decide if they want to earn more money by working more or earning more profits realizing they will still get the same percentage of the profits or wages.

Regressive Tax The proportion paid in tax falls as income rises. Lower income groups tend to be harder hit by these taxes because their overall income is lower so as result them pay more of a percentage of their income.

Transfer payments It is important for societies (in my opinion) to provide benefits for certain groups of citizens. Transfer payments are a way to redistribute the countries income with cash payments. Usually paid to low income households, single parents, in the form of hosing, unemployment benefits etc. Retired people and students may receive students loans pensions, health care etc.

Are transfer payments a “good thing?” If firms have to pay insurance and social security cost for workers they may hire less workers (unemployment) High taxes may discourage entrepreneurs and they may look to move to other countries that have more favorable tax laws for them. High taxes have a negative effect on overall economic growth because of the disincentive. Because of the nature of transfer payments some of the money will be “lost” in the process of the transfer.