Question

Does taxing the wealthy to give benefits to the poor increase social welfare? Explain (Public Economics: Expenditure).

Answer 1

Answer: Yes, taxing the wealthy to providing the benefits to poor increases the social welfare. This is the progressive taxation system which is used widely in many countries. Under progressive taxation, government imposes high income tax rates on wealthy and rich people and use the tax revenue to provide social benefits to the marginalized sections of the society. This reduces the income inequality among the different economic sections of the society. If the wealth lies in the hands of small amount of people, then economy faces low demand for goods and services and there would be low job creation. Reducing income inequality is the main concern of every government. With the help of progressive taxation, the gap between rich and poor diminishes and economy would slim down. If the income inequality increases, the demand for goods and services by poor falls. As per the social welfare function, the major goal is to maximize the utilities of each individual. In order to use the utilitarian social welfare function, the government redistributes wealth from the rich to the poor by increasing taxes that will decrease incentives to engage in progressive activities. The net decrease in aggregate economic surplus in society make the wealthy worse off by the amount the poor becomes better off. Applying higher taxes as income increases transfers revenue to those who earn less; increasing utility for those who earn less. For example, a tax causes a wealthy individual to decrease the amount of hours worked. In turn, these hours collect taxes which is now given to the poorer individual. When the wealthier individual decreases the amount of hours worked their income decreases. The wealthier individual is made worse off by the amount of dollars lost and the difference ascends due to the loss of economic surplus that transpires once people modify their monetary behaviors.