IB Economics/Macroeconomics/Distribution of Income

Purpose of taxes

 * 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

 * 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

 * 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.