IB Economics/Macroeconomics/Distribution of Income

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Distribution of Income[edit | edit source]

Purpose of taxes[edit | edit source]

  • 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[edit | edit source]

  • 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[edit | edit source]

  • 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.