Effect of Distributional Inequality on Stabilization Policy

1. Effect of Infrastructural Facilities on Stabilization Policy
2. Effect of Distributional Inequality on Stabilization Policy
3. Effect of Regional Imbalances on Stabilization Policy

Distributional inequality is the difference which is being found among individuals, among populations, and among countries. Distributional inequality is also called as income inequality or wealth inequality. Distributional inequality is found mostly in income, wealth and consumption patterns of the society. Thus, distributional inequality can also be described as the gap between rich and poor in terms of wealth and income.

During the last decade, distributional inequality and stabilization policy has been a major topic of research by various economists because of various kinds of disparities in income distribution, individuals working for their own self-interest and the assumption of perfect competition in the market.

Stabilization policy is governed through monetary and fiscal policy. Stabilization policy reflects the government’s role in achieving social preferences through different tax instruments available in the economy. The distribution of income in society is also being influenced by the stabilization policy both directly and indirectly.

Fiscal policy is the tax and expenditure policy of the government, and the taxes in fiscal policy are classified into two categories: direct taxes and indirect taxes.

Direct taxes are those kinds of taxes which are directly paid to the government in the form of personal or corporate income tax. Indirect tax is the tax which is being paid indirectly by the consumers, for example, VATS and taxes on commodities. Direct taxes have a great impact on the distribution of income among various sections of the society.

This can be explained with the help of the following example. If the government start levying more and more taxes on the weaker sections of society, then the weaker section will have to pay more, which will create economic inequality in the country, so the government, while framing the tax policy use to levy more taxes on the rich class and give various tax concessions and subsidies to middle and lower class so that there should be no disparity in income and wealth among various sections of the society.

Indirect taxes also create an environment of inequality in the country. For example, the commodities which are luxurious in nature, like gold and cars etc., should have more tax as compared to the commodities like soap and paste, etc., which are being consumed by all sections of society.

If there is a difference between the tax rates of commodities, then it will create wealth inequality in society, so while planning stabilization policy, the inequality concept is taken into due consideration, and then the prices are set for various kinds of commodities. Faulty taxation policy by the government creates distributional inequality in the country. Therefore, the tax reforms by the government should be such that it should give maximum revenue to the government and that revenue should be used for removing inequality in the country.

The formulation of a good budget for the poor by the government also removes inequality among various sections of society. The budget formation is also being done according to the fiscal policy of the government. The government, through stabilization policy, aims to reduce inequality between big and small farmers by imposing ceilings on the agricultural land holdings of rich farmers. These measures of stabilization policy in the field of agriculture will remove inequality in the area of agriculture. Thus, it is truly said that stabilization policy plays a prominent role in removing inequality from the economy.

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