Methods to Promote Equity: Policies of Redistribution
Chapter 11, p. 309-318
Questions:
What is the difference between a direct and indirect tax? What are examples of each?
Define and explain the difference between proportional, progressive, and regressive taxes.
How can income tax be used to lower income inequalities?
Adam Smith laid out four main characteristics of taxation:
o _________________: those paying should know how much they are paying
o _________________: easy to collect
o Economy: taxes should be cheap to collect realtive to their yield (“cost-efficient” to collect)
o Equity: fairness of taxes levied, efficiency (not counterproductive to goals of economic policies)
Equity (tax) means “fairness” of __________________________ (i.e., burden should be felt equally among those paying)
 _____________________ equity: “treating equals equal”—two people having the same income should pay the
same tax
 __________________ equity: “treating different people differently” in order to enhance fairness; less tax paid by
lower income earners than higher (again, normative)
Transfer payments: payments made by the government to individuals specifically for redistributing ____________
_________ from certain groups and ________________ others
 Transferred from those who work and pay taxes towards those who cannot/need assistance
 Groups are called ____________________ and include: elderly, sick, very poor (and their children), unemployed
Examples of payments: old age pension (Social Security in the US), disability, unemployment benefits, war veterans’
benefits, housing benefits for the poor, student grants, etc.
The government uses other methods to help with income inequalities:
1. Subsidized provision or ____________ provision of __________ goods (aka “services in kind”):
o _____________ and ________________ (major goods under-consumed by those with low incomes/in
poverty); both in provision and accessibility
o Provision of _____________________, including physical capital such as clean water, sanitation
This works by making certain goods available to people on low incomes that would not otherwise be able to afford them.
2. Government intervention in markets; i.e., minimum wage legislation, food price ceilings; rent control; price floors
for farmers
3. Taxation: the most important source of government revenue and source of transfer payments and subsidized provision
of goods (allows achievement of greater equity)
o Two broad categories of taxes: ____________ and ________________
Direct taxation: tax paid directly to the ______________________ tax authority by the ____________
– in the US, the _____________
– Taxpayer=__________________________________=firms and households
– Paid on income, wealth, or property
Firms pay: _________________ tax (corporate income tax) and ____________ tax
Households/individuals pay: _______________tax, _______________________ tax (profits from stockholding) and
property tax/inheritance tax
Social insurance contribution (payroll tax)—paid by workers and their employees
• Instead of going into the gov’t budget (fiscal year spending), it goes into specific funds for pensions, SS, and
health care (i.e., Canada)
•
•
This is also known as “___________________” taxation, as the money is earmarked, or set aside, for a
_____________________________
So why would it matter that many of today’s workers will be retiring in the next 20 years?
Indirect tax--tax paid indirectly to the ________________ tax authority by __________ selling goods/services
• Indirect taxes affect _________________, implies market equilibrium is ________________ affected
– Supply curve shifts _____________
– Can have negative and positive outcomes (externalities)
Types of indirect taxes:
• Value-added tax (VAT; Europe, Asia) or sales tax in the US
• Excise duties (on specifics/ “bad” g/s such as tobacco, gasoline, alcohol, gambling in US)
• ________________ (taxes on imports)
– aka ___________________
Calculating tax rate
• Using a tax table, multiply income times the corresponding tax rate.
– Data available through IRS or other government taxation organization
– Example (simple) table for Europe on p. 313
Progressive tax—as income increases, the fraction of income paid in taxes increases; creating an increasing tax rate
• Is it the most “fair”? Why? According to what principle?
Examples:
• ______________________
– Based on marginal tax rate, calculated using “layers” of income, or income brackets
• Taxes on ___________________________, for example, yachts and private jets
– usually paid by people wealthy enough to purchase such items
Proportional tax—as income increases, the fraction of income paid as taxes remains constant; constant tax rate
Examples:
• Some countries’ income taxes (flat tax)
– Can also be progressive with addition of exclusions (amounts not taxed, etc.)
• Sales tax
Regressive tax—as income increases, the fraction of income paid as taxes decreases; decreasing tax rate (aka “flat-rate”
tax, or unit tax)
___________________taxes are always regressive. A slight exception may be tax-exempt items such as necessities like
medicines
Examples:
• The FICA (Federal Insurance Contributions Act) tax is a federal payroll tax used to fund Social Security
• _______________ can also be considered a regressive tax.
– Every person buys relatively the same amount of food regardless of their income.
• Therefore a low income person would pay a larger proportion of their income for food sales tax
than a high income person
A note about these taxes:
• All three: progressive, regressive, and proportional relate not just to income tax, but to all types of tax (direct or
indirect)
•
•
•
This is because taxes are paid out of income; therefore, they can be compared with income
The more progressive the tax system, the more equal is the after-tax distribution of income, compared to
the pre-tax distribution.
Regressive tax systems tend to make the distribution of income less equal.
Video discussion:
Wealth inequality may be real, but is it unfair? And what does it mean for a society to be unfair?
The distribution of wealth in America is dramatically lopsided towards the 1% - a point vividly demonstrated in "Wealth
Inequality in America.” For many, there is something intuitively and philosophically unfair about this inequality. "We are
the 99%!" is a mantra of Occupy Wall Street's dissatisfaction, and a protest against America's status quo.
"Wealth Inequality in America" draws a striking picture, but is that the whole story? "Wealth Inequality in America"
misses a central point: do the poor in our society regularly lift themselves out of poverty? "How easy is it, or how difficult
is it, for folks who start off poor, to no longer be poor?"
Progressive tax is boon for city administration
Andreas D. Arditya, The Jakarta Post, Jakarta | City | Tue, April 12 2011, 8:00 AM
http://www.thejakartapost.com/news/2011/04/12/progressive-tax-boon-city-administration.html
In just over three months, the progressive tax plan for vehicle owners has yielded significant benefits, with the City Tax
Office recording a significant increase in revenue from the vehicle ownership tax.
City Tax Office head Iwan Setiawandi said Monday that the city had collected more than Rp 800 billion (US$92.8
million) in revenue from vehicle ownership tax revenue in the first three months of the year.
“It’s an increase of around 16 percent from last year’s revenue during the same period,” Iwan told reporters at City Hall.
Under the new tax program, the administration has imposed a 1.5 percent tax rate based on a vehicle’s value for the first
vehicle owned by an individual and 2 to 4 percent on additional vehicles they purchase.
The progressive tax system was enacted Jan. 1 this year.
The administration collected a total of Rp 3.1 trillion in vehicle ownership taxes last year, exceeding the initial target of
Rp 2.9 trillion. The target for 2011 has been set at Rp 3.5 trillion.
The Tax Office expects to collect higher taxes from 710,000 vehicle owners under the progressive tax system. There are
currently more than five million vehicles registered in Jakarta.
“The progressive system is based on principles of fairness. Those who make more money will have to pay more taxes. If
people own more than one vehicle, it means they earn more money,” Iwan said.
He said, however, that the progressive tax scheme was not initially aimed at reducing the number of vehicles or
congestion in the city.
“The primary goal is to collect more revenue. However, 10 percent of revenue from vehicle taxes will be channeled to
infrastructure projects and developing public transportation,” Iwan said.
Vehicle-related taxes have remained the city’s largest source of income. The City Tax Office aims to collect Rp 7.5
trillion from vehicle ownership transfer fees and vehicle ownership taxes this year.
The city administration expects to collect Rp 11.5 trillion in total taxes this year.
More than 1,500 new motorcycles and more than 500 new cars enter the city’s streets every day.
There are currently more than 11.3 million vehicles in Jakarta. The number is expected to grow to 12 million by the end of
the year.
Trisakti University’s transportation expert Trisbiantara said that the city had its priorities wrong in treating tax money for
infrastructure only as an afterthought.
“With the current tax system, the city practically robbed people of their money. They levied higher vehicle tax rates but
have yet to provide a proper public transportation system,” Trisbiantara told The Jakarta Post on Monday.
He said that the administration should have provided better public transport before imposing additional taxes.
“The owners of private vehicles, although they have been paying more taxes, have no better alternative because even the
TransJakarta bus rapid transit can’t handle the rush hour demand,” he said.
Trisbiantara also said the regulation that earmarked only 10 percent of vehicle tax revenue for public transportation
projects was flawed. “They should have given more than 10 percent. In fact, the largest sum should be allocated for public
transportation projects,” he said.