tax

Governments use both taxes and transfers to change the distribution of income. Transfers, such as those that fund public health care and education, family allowances, pension supplements, and child tax benefits, are intended to reduce poverty or provide basic income support for the population. Taxes may be levied according to “the ability to pay” principle, with higher burdens (measured as a percentage of income) assessed against those who have more resources to pay tax. A tax structure is said to be “progressive” if taxes as a percentage of ability to pay (often taken to mean income) increase as ability to pay increases, “regressive” if they decrease, and “proportional” if they are constant. Income taxes can be made progressive by providing exemptions or credits to low-income households and assessing tax rates that rise with the level of income earned by an individual or family. Sales taxes are often viewed as being regressive, but can be made progressive by exempting necessities or taxing them at a low rate or by providing a transfer or income tax credit to low-income taxpayers to alleviate the impact of the tax.