Question

Should the government try to equalize incomes more by raising taxes on the rich and giving more money to the poor? Why? How might such redistribution affect total output and growth? How would this redistribution impact living standards?

Answer 1

Yes, government should try to equalize incomes more by raising taxes on rich and giving more money to the poor . Income inequality will be high during lower amount of taxes or without any taxes. By raising tax amounts government can redistribute the income and reduce inequality. Redistribution of wealth means distribution of income from higher income people to lower income people. Government can redistribute the income by imposing progressive tax on society. Progressive tax system is designed in such a way that higher income people has to pay higher amount of taxes and lower income people has to pay lower amount of taxes. By imposing higher taxes , government can increase its revenue and government redistribute these revenue to society especially poor people through direct or indirect transfer payments to lower income people In one side higher taxes , reduces the willingness to work ,save and investment and reduces the output level in the economy. But on other side, redistribution of income to poor from rich raises the income level of poor people, then everyone earns same income, it will raise the standard of living of people. But the productivity and profitable investment will be decline. Because higher tax rate discourage capitalists to save and invest. Then economic growth will be slow down. But the countries that have manged to limit excessive inequality are countries that enjoy both faster growth and more sustainable growth