Redistribution

The second purpose of tax is to support the redistribution of wealth. Redistribution refers to redistributing the country’s resources from the wealthy towards the poorest and most vulnerable people, a strategy which can help to reduce inequality in society. However, redistributing wealth via tax can be done in a number of ways, and not all are equally just. In fact, the way a country’s citizens are taxed can either lessen or increase equality.

Therefore the already existing income inequality means that it is not solely enough to increase the amount of tax, instead governments must decide how to tax its population in order to ensure an equitable burden that does not worsen existing inequality.

Specifically, there are two ways in which tax can be applied on individuals in society that can lessen or increase income inequality. These two ways are progressive or regressive. A reliance on consumption taxes like sales tax or value added tax (VAT), for example on food, fuel and other goods is seen as regressive as everybody is taxed the same amount regardless of their financial status.

In contrast, an example of a progressive tax is income tax in some countries, as
index bands change the tax rate based on how much income is earned, and the more people earn, the more tax they pay (to a point).

This is because the marginal utility (i.e. the usefulness of the surplus) is lower as one earns more money . For example, when a person has less money, each unit of that money becomes more valuable. Think about it; the marginal utility of €10 to a person earning €4,000 per month is much greater than to a person earning €10,000 per month.