3.4.7—Taxation and redistribution

Progressive taxes and transfers can redistribute income, fund services and reduce poverty; they may also affect incentives, administration and tax avoidance.

Incidence depends on elasticities and enforcement, not only the statutory payer.

State the objective, who ultimately pays/receives and the behavioural response.

A refundable tax credit supports low-income workers but costs revenue and may change labour supply.

A progressive schedule does not guarantee progressive outcomes after indirect taxes.

A progressive tax takes a rising average share as income rises; a proportional tax keeps the average share constant; a regressive tax takes a falling share. $\text{average tax rate}=\text{total tax}/\text{income}\times100$, while the marginal rate applies to the next unit. Direct taxes include personal income, corporate income and wealth taxes. Indirect taxes are levied on expenditure and can be regressive because lower-income households may spend a larger income share on taxed goods. Distinguish statutory design from final incidence and the combined tax-transfer outcome.