The government raises the income tax on high incomes. Which income aggregate of these households does this change directly, and which budget function does it serve?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Personal disposable income; the redistribution function
Income tax is a personal tax payment, deducted from personal income to get personal disposable income. A higher tax on high incomes takes more from the rich, which changes the distribution of income: the redistribution function.
National income and private income are measured before personal taxes, so the tax does not change them directly. The allocation function is about providing public goods.
This question uses National Income Accounting and Government Budget and the Economy together.
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.” National Income Accounting: “2.3 Some Macroeconomic Identities … However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. Thus Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments. …” |