The government sector affects the personal disposable income by collecting tax through which it can change distribution of income. The redistribution objective is fulfilled by which of the following tax?

Income Tax

The correct answer is Income Tax.

The total national income of the country goes to either the private sector, that is, firms and households (known as private income) or the government (known as public income). 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. 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.

Income tax is a direct tax levied on the income of individuals and businesses. It is a progressive tax, meaning that the rate of tax increases as the income level rises. Progressive taxation is often used as a tool for income redistribution, aiming to reduce income inequality by imposing higher tax rates on those with higher incomes. Wealth tax and gift tax are also forms of wealth redistribution, but income tax is the most commonly used tool for this purpose. Sales Tax is an indirect tax.