IB Economics/Macroeconomics/Distribution of Income

Distribution of Income Purpose of taxes to raise gov. revenue to narrow the gap between rich and poor e.g progressive tax to safe guard health e.g. tax in cigarettes, alcohol influence consumer spending e.g. lead free petrol to control the economy (fiscal policy) to control externalities to stop/ reduce imports (tariffs) Types of Taxes direct taxation: income tax indirect taxation: tax that is included in expenses, levied on good/service and not on individual or organization progressive taxation: tax increases as income increases, the bigger your income, the larger % you pay of tax proportional taxation: tax percent remains constant regardless of income e.g. 10% regressive taxation: tax increases as income decreases, the bigger your income, the smaller % you pay of tax Profit Tax: a tax on the firms profits. Usually there are different rates for smaller and larger firms Wealth Tax: A tax on your wealth on an annual basis Inheritance tax/ Death Duties/ Estate Duties: when you die you leave behind an estate, the gov. taxes these estates Gift Tax/ Capital Transfer Tax: a tax on large gifts Capital Gains tax: a tax on the gain you make between buying and selling something. Usually refers to shares Transfer payments: payment by government as gift or aid and not for good or service. Higher level topics Laffer curve: a graph showing the relationship between tax rate and government revenue Lorenz curve: a graph showing the distribution of wealth in the economy. Gini coefficient: a number between 0 and 1 quantifying the distribution of wealth in the economy. 1 is perfectly unequal distribution and 0 representing perfectly equal distribution.