Question

In: Economics

Explain why redistributive policies (that involve taxing higher earners and redistributing some of these returns to...

Explain why redistributive policies (that involve taxing higher earners and redistributing some of these returns to lower earners) can give rise to an equity/efficiency trade-off.

Solutions

Expert Solution

Redistributive Policies
Redistribution of income through various policies helps the government or the social mechanism to reduce the level of inequality between the low earning groups and that of the high earning ones. Taxing at high rate to high income earners and spending the money through welfare activities, transfer payments, public services and charity would help reducing the level of inequality between different economic classes. Government applying progressive tax could collect more tax from higher income but to a maximum level of percentage above which the tax payers hesitate to pay tax. The tax collected is used for various governmental activities with the prime idea of making rise to equity in the society or for an efficient trade-off.
Various fiscal policies target in reducing inequality through public services, government discounts to lower income groups through providing free food grains, social security measure and transfer payments etc. These all have direct impacts on social welfare. Government’s responsibility and efficiency in social welfare makes impact on social equity and better trade-off. Only direct benefits can improve the gap within population. Transfer payments and social security measures suggest direct transfer of benefits to low income people. Public services where most of the beneficiaries are low income group are a way having positive effect on social equity. Thus, government finds the resources from taxing high income group to redistribute the low income ones reducing the level of inequality.


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