In: Economics
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.
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.