7. Equity and Efficiency
A key element of government policy that determines how much we can redistribute among households is the tax rate. The tax rate is used to raise revenues, which can then be used in government programs. What type of taxes we should use and how high tax rates should be are major questions that economics attempts to answer. This lecture provides an introduction to the economics of taxation.
Widening income inequalities around the world have triggered a debate over the extent to which taxes and/or social transfers should be used more actively for redistribution. The debate is not a simple one. There are many reasons why a country could pursue redistribution, such as the pursuit of social justice as an ethical imperative, or to achieve efficiency with equity in order to promote economic growth. Further complicating the debate is the fact that redistribution is a political matter, in which democracy and voice are important elements in determining its extent. Debate and disagreement aside, whether looking from the perspective of equity or of welfare, redistribution should be an integral part of economic or social policy.
Since the Great Depression most Americans have agreed that a principal responsibility of government is to redistribute income from the well-to-do to the impoverished and to those who are temporarily disadvantaged, most notably the unemployed. While many people complain about waste, fraud, and abuse in government income-transfer programs, or about the extent of income redistribution, few dispute the proposition that some level of redistribution is needed. Over the last twenty years, however, many economists—including some on the political left—have raised serious questions about the effectiveness of current transfer programs in helping the poor.
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