IB Economics 3.4.9 Role of Taxation in Reducing Poverty, Income and Wealth Inequality Notes

1. Poverty, income and wealth inequalities are one of the most pressing issues in contemporary economics.
2. In order to deal with these issues, governments often need to intervene.
3. One of the most common ways for governments intervention to reduce poverty and income and wealth inequalities is through taxation.

Direct taxes

There are three main types of direct taxes:

1. Personal income taxes: taxes levied on an individual's income from factors of production (rent, wages, interests, profits).
2. Corporate income taxes: taxes imposed on a company's profits after deducting expenses and allowances.
3. Wealth taxes: taxes on the market value of an individual's assets, such as property, investments, and savings.

Progressive, regressive and proportional taxes

Taxes can be differentiated by the following characteristics:

1. Progressive taxes:
   1. The higher the income, the higher the proportion of income paid as tax will be.
   2. For example:
      1. If you make less that USD 50,000 a year, you pay 10% of income tax.
      2. If you make between USD 50,000 and USD 100,000 a year, you pay 20% of income tax.
      3. If you make more than USD 100,000, you pay 50% income tax.
2. Regressive taxes:
   1. As income increases, the proportion of income paid as tax lowers.
   2. For example:
      1. If you make less that USD 50,000 a year, you pay 50% of income tax.
      2. If you make between USD 50,000 and USD 100,000 a year, you pay 20% of income tax.
      3. If you make more than USD 100,000, you pay 10% income tax.
3. Proportional taxes:
   1. As income increases, the proportion of income paid as tax will stay constant.
   2. For example:
      1. If you make less that USD 50,000 a year, you pay 20% of income tax.