Question

Explain how increased redistribution through progressive taxation and income transfers might affect economic growth. What kinds of changes in taxes and transfers could promote economic growth, if any? Are there ways to increase economic opportunity that would promote growth and decrease inequality?

Answer 1

Progressive taxation means charging a higher % of income tax from the rich and charging a lower % from the poor.this tax rate is applied differently on different brackets of income earners. for example A is earning INR 30000 per month is slapped a tax of 10% while B earning 80000 per month is levied a tax of 30%. Here A has to pay a tax of Rs3000 while B has to pay a tax of rs24000.so government over here acts like a robinhood who takes money from the rich and distributes it amongst the poor by way of free healthcare systems,ration shops,education etc.This affects the lower income group positively while it affects the rich income group negatively.Rich people feel that they are being punished for earning more money.

If it is a recession then expansionary fiscal policy will work.In this the government spends more money through transfers, (government expenditure on social and economic policies) than it collects through taxes. This type of policy is used during recessions to strengthen the economic growth and push the economy towards full employment. During recession money spending has to be increased which can happen if government pumps in money in the system . so taxes are reduced and transfers have to be increased.

a contractionary fiscal policy is followed in economic booms. The government collects more money through taxes than it spends because money spending,aggregate demand has to be cut. so tax rate is increased while transfers are reduced.This policy works best during economic prosperity.. economic growth is slowed down and inflation is checked.

Below are some ways of increasing economic growth and reducing inequality:

*the funds collected by way of tax can be used for providing subsidised healthcare facilities , compulsory education , standard housing facilities & some kind of jobs to lower income group.

*granting loans on easy terms to those in need.

*government financial support for those distressed groups who want to do higher education & research..

*offering skill development programms to those in need so that these skills can be converted to human capital.