1. 5.3 Taxes and redistribution of income
Understand the difference between progressive, proportional and regressive taxes.
Identify these taxes in UK.
Understand how redistribution of income can be achieved through taxation and government spending.

2. Key terms Regressive Tax Proportional Tax Progressive Tax
Draw graph page 72.

3. Indirect taxes are regressive
This is because they. The same amount of tax being placed on items no matter what income you have.
Indeed some taxes are very regressive as they take a large % of low income. i.e excise duties on alcohol, petrol and tobacco.
Some necessities are not taxed which can help reduce the regressive effects of this tax.
£500 TV plus VAT 20% = Total £600.00
It is easier to pay the more you earn.

4. Income tax is progressive
All tax payers have tax allowance.
However income tax is then taxed at different rates. They higher income earners will pay higher wages.
It is progressive as:
1. tax allowance is larger% of lower income, so the tax is lower %.
2. People on higher incomes pay a higher rate of tax on extra income.
Key Point – Progressive tax means the more you earn the greater the % of tax you pay.

5. Proportional Tax
Here the same % of income tax is paid no matter what you earn.
Jersey is an example of this type of Income tax. One does pay more the more they earn, but usually from 20%.

6. Redistribution Measures
If government wishes to reduce inequalities in distribution of incomes, it will increase progressive direct taxes and reduce regressive indirect taxes.
It will also increase the transfer payments (benefits) paid to lower –income groups.

7. Consequences of redistribution measures.
Is the tax system right? Well it’s a social issue.
Look at reduced inequalities.
Info.
In 1990’s Conservatives moved away from a direct tax system to a more indirect tax system. This was due to looking after the wealthy. VAT was 8.5% at this time. The reason why income levels were reduced is that it was felt that people would work harder if paying less income tax!

8. HOWEVER:
There is evidence that everyone has a realistic aspiration level which is a mixture of materialistic and leisure.
Guy works 40 hours a week.
Income £500
Tax £100
Net income £400.
If income drops to £50, Net now £450.
However if he earns enough and has everything he needs he may say he would prefer the extra two hours leisure time, work 38 hours, so £50 tax and back to net income £400. (opportunity cost)
On the other side, incomes tax goes up to £150 he will have to work 42 hours.