Published by Patrick Mutisya · 14 days ago
Redistribution of income is a key macro‑economic objective for governments. It seeks to reduce the gap between the rich and the poor, ensuring a more equitable share of national income and improving social cohesion.
Taxes can be designed to take a larger proportion of income from higher earners and a smaller proportion from lower earners.
| Tax Type | Definition | Effect on Income Distribution |
|---|---|---|
| Progressive Tax | Tax rate increases as taxable income rises. | Reduces inequality by shifting income from high‑income to low‑income groups. |
| Regressive Tax | Tax rate decreases as taxable income rises (e.g., sales tax). | Can increase inequality because low‑income households spend a larger share of their income. |
| Proportional (Flat) Tax | Same tax rate for all income levels. | Neutral effect on relative income distribution, though absolute impact differs. |
Payments made directly to individuals or households without a corresponding service.
Government assistance that reduces the price of essential goods and services.
Provision of free or low‑cost services such as education, healthcare, and public transport benefits lower‑income groups.
Two common measures are used to assess how effectively a government redistributes income:
For example, if a country’s Gini coefficient falls from 0.45 to 0.38 after a series of progressive tax reforms and increased welfare spending, this indicates a reduction in income inequality.
Assume a simple three‑band tax system:
\$\$\text{Tax Payable} =
\begin{cases}
0 & \text{if } Y \leq 10{,}000 \\
0.10(Y-10{,}000) & \text{if } 10{,}000 < Y \leq 30{,}000 \\
2{,}000 + 0.20(Y-30{,}000) & \text{if } Y > 30{,}000
\end{cases}\$\$
Where \$Y\$ is annual taxable income. This structure ensures that higher earners pay a larger proportion of their income in tax.