Direct Taxes:
Direct Taxes are taxes directly on earnings or wealth (such as income, interest from
savings, firms’ profits, etc). This is unavoidable since people are obligated to fill out tax
return forms and similar forms. The tax is direct because it comes directly from income.
Indirect Taxes:
Indirect taxes are taxes on goods and services, and are also called expenditure taxes or
consumption-based taxes. They are avoidable taxes since the consumer has the ability to
buy or sell specific goods and services, which allows them to not pay those taxes. An
example is the sales tax on groceries.
Progressive Taxes:
Progressive taxes are taxes that increase in percentage as the wealth or earnings of a
person increases. This means that the richer people pay more money (as a percent of
their total income) in taxes than the poorer. For example: most countries income taxes
are progressive. They use tax brackets where earnings up to a certain point are only
taxed at a certain percentage, but that percentage increases for every dollar passed that
amount. The more money made, the more money is going to receive a higher taxation
and thus a larger percentage of the total wealth is taxed at the higher level.
Proportional Taxes:
Proportional taxes are equal for all levels of income. No matter the wealth or earnings of
a person, they will pay the same percentage of their income as all others. Proponents
claim this is far simpler than the complex system of income taxes. It can also be called a
flat tax.
Regressive Taxes:
Regressive taxe are the opposite of progressive taxes. Instead of the richer paying a
larger percentage of their income, the poorer pay a larger percentage. An example is
sales tax, because the $50 both might pay for the same set of goods is a larger percentage
of the poorer person’s income than the richer person’s income.
Transfer Payments
What happens if the federal government wishes to achieve income redistribution?
Most likely, they would use transfer payments. Transfer payments are payments from
the government to individuals used to redistribute a country’s wealth. Some
examples of this type of payment are social security, grants, pensions, welfare, and
unemployment benefits. They do not create output nor do they directly exhaust
resources, so they basically just shift the money supply around to benefit the masses,
rather than the rich elites of society.
Suppose that Molly is laid off from her job and is in the middle of searching for a
new job. However, the economic crisis that is happening is preventing her from
getting a decent job with a decent wage. Thus, she would ask the government for
unemployment benefits and/or a pension with which to survive until she finds a job.
The Laffer Curve
The Laffer curve shows the relationship of the level of tax rates and the
government revenue. According to the graph of the Laffer curve, shown below, there is
an equilibrium point at which the maximum tax revenue is earned, which is at 50% tax
rate. From there, revenue decreases as tax rates increase
The Laffer Curve
Revenue
E
0
Tax rate (%)
100
Because of this particular relationship between tax rates and government revenue,
this graph shows the government what tax rate they should impose for the maximum
revenue, which would be at 50%. However, the masses would not agree with this
extremely high tax rate, so the government would have lower the percentage so that they
can still get some revenue and placate the masses. Thus, the government will never reach
maximum revenue.
Let’s say that the US government is wanting to redistribute the country’s income.
Then, it would implement progressive taxes where the govt takes a higher percentage of
the rich’s money than that of poorer people. Even if this means that their revenue
decreases, this is what the government could do to achieve this goal.
The Lorenz curve and the Gini index
The Lorenz curve is a graph of the cumulative distribution formula. In other
words, it is used to show how income is distributed within one society or country. For
example, the US’s Lorenz curve would show that the bottom 20% of the society only
owned 30% of its wealth while the top 20% (80%-100% on the x-axis) owns 40% of the
wealth (60%-100% on y-axis). This curve is used to depict social (in)equality. Below is
the graph itself.
% of income
The Lorenz Curve
Perfect Equality Line
80
60
40
20
Japan
0
20
40
60
% of households
Panama
80
100
Associated with the Lorenz curve, the Gini index is a statistical way (in %) to
measure inequality and income distribution. It is defined as a ratio with values between 0
and 1 written as a decimal. While a low Gini coefficient indicates more equal income or
wealth distribution, a high Gini coefficient shows more unequal distribution with 0
corresponding to perfect equality and 1 corresponding to perfect inequality.
For example, the MDCs would have a relatively low Gini index while the
corruped LDCs would have high Gini coefficients. If these surpass .5, it denotes that the
country has market failure. In terms of the graph, the closer the curve is to the perfect
equaltiy line, the lower the Gini index is (and vice versa).
MINI-IA
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJ0_7qFlWdrI
This article speaks about the state of South Africa’s economy as a result of the
global economic crisis. The ruling African National Congress put out a statement in
January 2009 that they will be making moves to improve the standard of living and to
change the economic policies. One aspect of improving the standard of living was to
reduce income inequality, which brings up the Lorenz curve.
As South Africa is a LDC, it can be assumed that their Gini index, a statisitical
measure of income equality with the range of 0 to 1, was above the .5 mark, showing
market failure and income inequality. This assumption is correct, for in 2000, South
Africa’s Gini coefficient was 57.1. Hence, its Lorenz curve, a graphical represntation of
the Gini index, would be similar to that of Panama in the graph under the section. With a
curve shaped like this, South Africa’s poor are not owning enough of the country’s
welath to improve itself while the top elite of the country have a high majority of the
wealth to become richer. Thus, the ANC is trying to improve income inequality so that
the country as a whole can improve, as a solution to the global economic crisis.