Discuss three levels of conflict of interest

i) Conflict between allocation and distribution
Taxes are normally imposed so as to redistribute income and wealth and raise funds
for government to provide social good. In order to affect this, a vertical progressive
tax to collect more from the rich and less from the poor is imposed.
But if you looks at less developed countries budget is low and majority of earners are
in lower and middle income classes, hence causing conflicts between allocation and
distribution function.

ii) Conflict between distribution and stabilization function:-
Stabilization functions are used to stabilize the economy. When there is need to
stimulate the economy (time of recession) taxes on lower income groups should be
reduced, since their marginal propensity to consume is higher than that of the rich.
This would lead to increased disposable income, demand, output produced and thus
employment. The opposite course has been made in times of inflation, namely that taxes on low-income groups should be raised, since they are more potent in reducing demand than
taxes on higher income. Another reason would be, by taxing the rich a lower rate;
they would be motivated to save more because their MPS are high. Conflicts arises in
such as approach because the distribution function of budgetary policy does not
achieve the aims of deducting more from the rich and less from the poor.

iii) Conflict between distribution and growth and economy
Objective of the budget is to attain high growth rate in economy. This would only be
achieved if capital formation, savings and investments are increased. This would
mean withdrawing more from poor and less from rich. This is because people with higher propensity to save are high income people. Conflict arises between distribution and growth. The aim of distribution function is to deduct more from the rich and less from the poor, which is the opposite of the goal of high growth rate.

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NatalieR answered the question on June 21, 2022 at 07:45