Question

1. Briefly describe the tradeoff between equity and efficiency of tax systems using a few examples.

Answer 1

All resources will be fairly limited in any community at any time. We can't get everything we want. We have to decide our goals and then distribute the money. In such a scenario we need to address productivity and equity targets. If the allocation of resources or goods between different members of society in an economy is equal, it implies equity. Performance brings the most use of scarce capital at the lowest price possible. Performance refers to the size of the economic resource and equity refers to the distribution of the economic resource. When we allocate the money we must face a trade-off between productivity and equity.

The Government's environmental policies will illustrate the best example of trade off between equity and performance. Who gets the most out of natural resource extraction and what cost is a policy issue that needs answering. The projects undertaken will have a negative impact on the locals who might have been living there for many years. These are the project's perpetrators. Yet policy programs and initiatives will have several targets to the nation's greater interest. Therefore there should be a trade off between the effective utilization of resources in that area and the value of the allocation of resources to the people in that region.

To do so, the people who reap the benefits of the policy will have to pay for the policy's victims and make them the partners in the development works undertaken. The most difficult issues are those involving trade-offs, especially between improving market efficiency and fostering equity. Government sometimes takes tough tradeoffs but often productivity and equity go hand in hand. Providing fair and at the same time effective educational opportunities and health services for the vulnerable. It allows for a equal distribution of resources for people's well-being, which in turn improves the economic output

Economy alone can not determine the best way of balancing equity and effectiveness. This topic often focuses on the social and political factors. Let's look for our case at Indian tax scheme. India used to have a progressive taxation scheme in the early years of independence in which rich citizens had to pay higher taxes based on their income in that particular year. But the post-liberalization views on fairness and impact on our economic and political agenda varied. High tax rates were claimed to reduce economic efficiency, as well as motivation to operate. The tax changes were implemented, and now there are only three income tax slabs today. Even the highest earner would pay not more than 30% of his income as tax. We can see that there is a constant trade off between equity and efficiency in this case.