Consider the following statements about the redistribution function of the government budget:
(A) Under progressive income taxation, the higher the income, the higher is the tax rate.
(B) Firms are taxed on a progressive basis, where the tax rate rises with profits.
(C) The government affects the personal disposable income of households by making transfers and collecting taxes.
(D) Indirect taxes are regressive in nature, since they impact all income groups equally.
(E) Out of private income, what finally reaches the households is known as personal disposable income.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (C) and (D) only
(A) Under progressive income taxation, the higher the income, the higher is the tax rate. — Correct. This is what progressive taxation means.
(B) Firms are taxed on a progressive basis, where the tax rate rises with profits. — Incorrect. Firms are taxed on a proportional basis: the rate is a fixed proportion of profits.
(C) The government affects the personal disposable income of households by making transfers and collecting taxes. — Correct. This is how the redistribution function works.
(D) Indirect taxes are regressive in nature, since they impact all income groups equally. — Correct. Rich and poor pay the same tax on a good.
(E) Out of private income, what finally reaches the households is known as personal disposable income. — Incorrect. That is personal income. Personal disposable income is the part of it that can be spent.
NCERT (2026-27): “Redistribution Function of Government Budget … Out of private income, what finally reaches the households is known as personal income and the amount that can be spent is the personal disposable income. The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.” “5.1.2 Classification of Receipts … The redistribution objective is sought to be achieved through progressive income taxation, in which higher the income, higher is the tax rate. Firms are taxed on a proportional basis, where the tax rate is a particular proportion of profits. …” “… In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature – they impact all income groups equally). …” |