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

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

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

6. 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

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

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

10. 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

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

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