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Summary Fiscal policy on poverty and the distribution of income
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Fiscal policy on poverty and the distribution of income notes.
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Arguments For Using Indirect Taxation Arguments Against Using Indirect TaxationChanges in indirect taxes can change the pattern Many indirect taxes make the distribution of
of demand by varying relative prices and income more unequal because indirect taxes are
thereby affecting demand (e.g. an increase in more regressive than direct taxes
the real duty on petrol)
They are an instrument in correcting for Higher indirect taxes can cause cost-push
externalities – indirect taxes can be used as a inflation which can lead to a rise in inflation
means of making the polluter pay and expectations
“internalizing the external costs” of production
and consumption
Indirect taxes are less likely to distort the If indirect taxes are too high – this creates an
choices that people have to between work and incentive to avoid taxes through “boot-legging”
leisure and therefore have less of a negative – e.g. the booze cruises to France where duty on
effect on work incentives. alcohol and cigarettes is much lower.
Indirect taxes can be changed more easily than Revenue from indirect taxes can be uncertain
direct taxes – this gives policy-makers more particularly when inflation is low or there is a
flexibility. Direct taxes can only be changed once recession causing a fall in consumer spending
a year at Budget time
Indirect taxes are less easy to avoid, often There is a potential loss of welfare from duties
people are unaware of how much in duty and e.g. loss of producer & consumer surplus
other spending taxes they are paying
Indirect taxes provide an incentive to save Higher indirect taxes affect households on lower
savings help to provide finance for capital incomes who are least able to save
investment
Indirect taxes leave people free to make a Many people are unaware of how much they are
choice whereas direct taxes leave people with paying in indirect taxes – they may be taxed by
less of their gross income in their pockets stealth – this goes against one of the basic
principles of a tax system – that taxes should be
transparent
How can fiscal policy reduce poverty?
Government spending on welfare: education, healthcare
Benefits/ transfer payments: unemployment and welfare
Progressive taxation: increasing income tax threshold
Increasing labour market participation
Minimum wage
Government spending on infrastructure
Increased government spending on public goods
Reducing taxes on goods which are more likely to be bought by those in poverty
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