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Prakhar Misra
August 9, 2017
A Governments Role in Tackling Inequality
growth. In fact, consumption makes up 70 percent of the U.S. gross domestic product. Increased
consumer spending leads to higher production numbers, even increasing wages and decreasing
across the world in recent years. The Occupy movement in the United States brought concerns
of excessive power in concentrated hands as a result of condensed wealth distribution. The fact
of the matter is that governments should look to put money in the hands of those who are most
likely to spend it, while aiming not to discourage workers with astronomical income taxes. These
governments can even reduce the volatility of business cycles through the redistribution of
wealth.
should work to put money in the hands of people who are most likely to spend it. The economic
idea of marginal propensity to consume (MPC) refers to the proportion of additional pay that a
consumer spends on goods and services. If a consumers income were to increase by one dollar
and he or she spent 80 cents on goods and services, their MPC would equal 0.8. Economic
studies show that in the U.S. the MPC for low-income households is significantly higher than
that of the high-income households. In other words, if the same amount of money were given
spend much more of it. The high-income households would save most of the money as their
income is already enough to pay for their desires. It is quite clear that governments can spark
economic growth by focusing on the MPC of different households. There is, however, a point at
Governments must be careful not to discourage hard work through aggressive policies
against economic inequality. Economist Arthur Laffer developed a theory explaining that as
taxes increase from low levels, tax revenue will increase until reaching an ideal point, also
known as the efficient tax rate. The Laffer Curve illustrates that the ideal point is what the
government searches for because it represents the maximum tax revenue while people still
work hard. Beyond this ideal tax rate, an excessive tax rate can discourage workers from working
as hard as possible. The ideal tax rate maximizing tax revenue, allowing governments to
redistribute wealth and work to close income inequality gaps. In essence, simply increasing tax
rates will not necessarily increase tax revenue. Disincentives from high-end tax rates can
actually drive workers away from entrepreneurial endeavors. Workers may even decide to
substitute work for leisure, realizing how heavily their work income is taxed. Even more
seriously, workers could decide to move to another country with fairer tax rates or strategically
avoid taxes. There are certainly instances in which slowing down economic growth can help
avoid rapid creating economic bubbles that could crash the economy, but excessive tax rates can
and sparking increases in consumption. Poor policies, like excessive tax rates, can actually drive
down tax revenue and have an inverse effect on the ability of the government to redistribute