Taxation as a tool of redistribution in developing economies

Abstract

Reducing inequalities in income is regarded by most developing economies as one of the objectives of economic policy. For example, the Indian First Five-Year Plan states, "It is no longer possible to think of development as a process merely of increasing the available supplies of material goods. It is necessary to ensure that simultaneously a steady advance is made towards realization of wider objectives such as full employment and the removal of economic inequalities." 1 The same viewpoint is reiterated in the second and third plans. One of the tools available for achieving this objective is fiscal policy which can accomplish this task both through public expenditure and taxation.2 In this note an attempt is made to look at some of the problems that might arise if taxation is used as a means to reduce inequalition.