Question

How can tax be used as an instrument to bring about equitable distribution of wealth and income?

How can direct taxes reduce income inequalities.

Mention one way by which the government can reduce the disparity in income and wealth distribution of its citizens in a developing economy.

Explain two ways by which the government can reduce income inequalities in a developing economy.

How can the government help in reducing inequalities of income?

Can direct taxes reduce income inequality?

Explain how taxation can be used to reduce inequality of income.

How does direct tax reduce income inequality?

Answer 1

The government can reduce income inequalities in the following ways:

1. Direct taxes are progressive in nature.
2. Rich people are subjected to higher rates of taxation, while the poor are exempt from direct taxes.
3. The policy of transfer payments (like old age pensions and unemployment allowances) can be used to transfer incomes to poor people. 
4. The government may subsidise the consumption expenditure of low-income groups by providing subsidised food through fair-priced shops.
5. Hence, these taxes help in removing inequalities of income.