Policies for income inequality and poverty

Direct tax

• refers to taxes levied on income or wealth (unavoidable)

• paid directly by taxpayer to tac authority

• burden cannot be sifted to another person

• effect : disposable income decreases , demand curve shift left

• Eg: personal income , corporate , wealth tax

taxable income formula

gross income - allowances (govt provided)

gross income formula

Earned + Unearned (dividends from stocks / interest)

Indirect tax

• refers to taxes levied on expenditure or the production/consumption of goods

• paid indirectly to government through firms which sell the good

• effect : shift SS to the left , firms pay tax to govt increases COP

• eg : GST , custom duties , excise tax , cigs and alcohol tax

average tax rate

refers to the proportion of total income that is paid in taxes. Indicates overall tax burden upon taxpayers

ATR= total tax payable/total income

marginal tax rate

refers to the proportion of additional income that is paid in taxes. Indicates additional tax burden imposed on additional income earned

MTR= change in tax paid/change in income

proportional taxation

as income increases , fraction of income paid as taxes remain constant

proportional tax formula

• everyone take away the same proportion of income form taxpayer

• although one may be higher in absolute value , proportion of income paid in taxes is the same

• Tax paid = income x tax rate

progressive tax

as income increases , fraction of income paid as taxes increases

• takes away a greater proportion of income from those with higher income

• aims to tax the rich proportionately more than the poor so that after tax distribution of income and wealth will be more equal

how are income taxes calculated for progressive taxation

• applying different tax rate to each successive layer of income

benefits of progressive tax

limitation of progressive tax

regressive taxation

as income increases , fraction of income paid as taxes decreases

• takes away a smaller proportion of income from those with higher income than those with lower income

• proportion of income paid in tax (average tax) decreases as income increases

advantage of regressive tax

transfer payment

payments made by the government to individuals specifically for the purpose of redistributing income away from certain groups towards other groups

• people who receive transfer payment : elderly, the sick , unemployed , poverty

advantages of transfer payment

disadvantages of transfer payment

Universal basic income

to provide residents a country with a sum of money that they would receive regardless of any other income they would have

1. reduces income inequality and poverty

2. but expensive , increase govt spending , all households that dont need still receive

targeted government spending on goods and services advantage

targeted government spending on goods and services disadvantage

govt intervention — minimum wage

a legal price floor set above the market equilibrium wage with the aim of increasing income of low skilled or low income workers

minimum wage advantages

minimum wage disadvantages

price ceilings on necessities

a legla maximum price set below the free market equilibrium price