Your money

Distribution of income is part of the IB syllabus for macroeconomics .

aTypes of TaxesEdit

Direct: Direct taxation is when the government takes the tax money directly from the citizen (or a household), hence it being called a direct tax. Examples of this are income tax, property tax, pay roll tax etc.

Indirect: Indirect taxation is a tax that is collected by a middle man and then is transferred to the government when they file their tax returns. In other words you don't ever see exactly what you are paying because the person never deals directly with the tax. Some examples of indirect taxation are sales tax, goods and services tax, and value added tax (VAT).

Indirect tax can increase the price of a good so that the consumer is paying more for the product because they are paying the tax.

Many indirect taxes make the distribution of income more unequal (less equitable) because indirect taxes are more often regressive than direct taxes (e.g. if a poor person spends a dollar on candy, the 7 percent sales tax makes up a larger percent of their income than it would of a rich person's income).

Both methods of taxation have inefficiencies associated with them, and to this day economists debate over which method is more inefficient.

Tax StructuresEdit

Progressive: Progressive taxation is defined as a system of taxation, in which persons or corporations are assessed a greater percentage of their income as tax liability according to their theoretical ability to pay. In essence, a progressive tax is a tool used by the government to redistribute income from rich to poor. This category of tax increases the tax rate (by percentage, thus increasing the actual amount faster than a proportional tax) as the available taxable income increases. Reasons for this type of tax structure are that of decreasing the marginal benefit and reducing the tax incident of those with lower incomes. Indeed, the extent of the tax would undoubtedly affect economic components such as choice (opportunity cost, production possibility curves, ect...) and growth.

Progressive taxation 1

Proportional: Proportional taxation is defined as a system of taxation in which the amount a person is taxed increases linearly as their income increases. This allows for everyone to pay a reasonable amount of their income for taxes. Proportional taxes are better than regressive taxes yet not quite as good for the poor as progressive taxation. It also includes that everyone pays the same percentage of income, so there is no wealth distributed to anyone at all. The graph would produce a linear line.

Regressive: Regressive taxation is defined as a system of taxation in which the rich pay a lower percentage of their income to taxation than poor people (this means the actual dollar tax amount can be increasing with income, but as a percentage it actually decreases). So when everyone is taxed say $10,000 of their income, people who only make $100,000 are paying 10% of their income, which has a large effect on their spending, whereas people who make $1 million have only a 1% tax, and it affects their spending very little. Regressive taxation shifts the distribution of income in the favor of the rich.


These payments are considered to be nonexhaustive because they do not directly absorb resources or create output. Examples of certain transfer payments include welfare (financial aid), social security, and government subsidies for certain businesses (firms). Transfers are also given to the people that are currently unemployed. They receive payment from the government until a certain time or until they are able to find a job again. So basically a transfer is money that the goverenment directly gives out to people. Some of these transfers are called public goods, and would not be possible without taxation. Along the way there is also the leaky-bucket, in which money is lost as it is being transfered due to processing. A scenario such as a man coming to the U.S to work, and sending money back to his home country for his family is also considered a transfer.

- Payments to persons that are not made in return for goods and services - meaning that transfers don't count in GDP because the money has already been accounted for in the national income accounts.

Laffer CurveEdit

The Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. The curve suggests that they are points at which decreasing the tax rate would yield an increase in government revenue as the desire to work is increased. It implies that at extremely high tax rates government revenue will be low because there will be little incentive for people to work. Conversely, a low tax rate, while increasing work incentives, yields a smaller government revue simply because the percentage being taxed is so though. The Laffer Curve is hypothetical, controversial, and while it seems a good model, specific figures can hardly be put on it.

The Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation.

Lorenz CurveEdit

The Lorenz Curve is a graphical representation of the proportionality of the distribution of income in a country. Every point on the Lorenz curve represents a statement like "the bottom 10% of all households have 2% of the total income." Perfect income distribution would result in a straight line while one person holding would result in a graph of a right angle. Real world situations fall in between the two. (The relationship between cumulative population and wealth.)

Gini coefficients

  • The Gini coefficient is a measure of statistical dispersion commonly used as a measure of inequality of income or wealth. The Gini coefficient is usually defined mathematically based on the Lorenz curve. When used as a measure of income inequality, the most unequal society will be one in which a single person receives 100% of the total income and the remaining people receive none (Gini coefficient of 1). The most equal society will be one in which every person receives the same percentage of the total income (Gini coefficient of 0). Real world situations fall in between the two. The higher the value (closer to 1), the more uneven the distribution.
  • An example of a nation that has a curve relatively similar to the linear line would be Canada, Australia, France, or the United Kingdom. These countries have a relatively even distribution of wealth and a lower Gini coefficient.
  • An example of a nation that has a curve further from the linear line and more exaggerated slope would be South Africa, Bolivia, or Niger. These countries have a relatively uneven distribution of wealth and a high Gini coefficient.
  • Although there has been much hypothesizing, there is no proven link between the distribution of income in a country and that countries level of development.

  • G = Gini Coefficient
  • G = A / (A+B)

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