Unit –III | unit 3 fiscal policy

Macro Eco

Unit –III

Fiscal policy

Q1)What are the key objectives of fiscal policy?

Ans. The key objectives of fiscal policy are:

Optimal allocation of economic resources. Its purpose is that fiscal policy should be structured to increase the efficiency of productive resources. To ensure this, governments should spend on those public works projects that give them maximum employment.
Fiscal policy should aim for an equitable distribution of wealth and income. That means that fiscal policy needs to be designed to bring about reasonable income equality among different groups by shifting wealth from the rich to the poor.
Another purpose of fiscal policy is to maintain price stability. It can have a big impact on fixed income classes while benefiting speculators and traders. Fiscal policy must be such that it maintains reasonably stable price levels, thereby benefiting all sectors of society.
The most important purpose of fiscal policy is to achieve and maintain full employment. It automatically achieves most other purposes. Fiscal policy aimed at full employment envisions a tax system direction, not to increase revenue, but to be aware of the impact of certain types of taxes on consumption, savings and investment.

The issue is determining the amount and direction of government spending not only to provide specific services, but also to adapt public spending to the general patterns of total spending currently taking place in the economy.

These goals, especially price stability and full employment goals, are not always compatible. The purpose of fair distribution of income can be inconsistent with the purpose of economic efficiency and economic growth. Fiscal policy can be adjusted to transfer wealth from the rich to the poor through taxation with the aim of bringing about income redistribution. However, the transfer of income from the rich to the poor has a negative impact on savings and capital formation. Therefore, fairness and the purpose of growth are inconsistent.

Q2) Write down the measures of fiscal policy.

Ans. The measures of Fiscal policy are:

Fiscal policy tools are taxes, spending, public debt, and national budgets. They consist of changes in government revenues or tax rates to encourage or limit private spending on consumption and investment.
Public spending includes regular government spending, capital spending on public works, relief spending, various types of subsidies, remittances and social security benefits.
Government spending generates income, and taxes primarily reduce income. Managing public debt has also become an important tool in fiscal policy in most countries. It aims to influence total spending through changes in liquid asset holdings.

During inflation, fiscal policy aims to curb excessive total spending, while during recession it aims to make up for the lack of effective demand to lift the economy from the depths of the recession. The following considerations should be noted when adopting appropriate policy measures.

Q3)Write short note on Taxation policy.

Ans. The structure of tax rates needs to change according to the prevailing conditions in the economy. Taxes determine the size of disposable income in the hands of the general public and therefore the amount of the inflation-deflation gap. During depression, the tax system should be something that encourages personal consumption and investment. Meanwhile, during inflation, the tax system must reduce consumption and investment.

During depression, general reductions in corporate and income taxes are provided by Professor A H. Hansen, M. Kalecki, R.A. Has been endorsed by economists such as. Musgrave because low corporate taxes encourage "venture capital" and thereby encourage more investment, while this leaves higher disposable income and induces more consumption for people.

However, some have raised serious questions about the potential stimulus effect of tax cuts on investment. It has been argued that even significant tax cuts will not change entrepreneurial decisions.

Mr. Calecki expressed the view that tax cuts to increase consumption and stimulate private investment are not a practical solution to the unemployment problem, as income taxes cannot be changed so often. The government will have to develop long-term fiscal policy.

During inflation, new taxes can be levied to wipe out surplus purchasing power. However, you need to be careful not to raise taxes enough to curb new investment and cause a recession. Expenditure tax and excise tax have the property of preventing inflation. During inflation, fiscal authorities should aim to impose taxes, such as reducing current excess demand for certain commodities, rather than aggregate demand.

Redistribution taxation is probably the best way to raise and stabilize the consumption function. Redistribution taxation means a progressive tax structure. This means that high-income groups are taxed at high rates and middle-income and low-income groups are taxed at low rates in order to increase personal consumption.

Q4) Explain the statement” Public spending can be used to stimulate production, income and employment”.

Ans. Public spending can be used to stimulate production, income and employment. Government spending forms a very important part of the total spending of the economy. Its reduction or expansion causes large fluctuations in total income. It can help coordinate consumption and investment to achieve full employment.

During inflation, the best policy is to reduce government spending to control inflation by giving up plans that are justified only during deflation. Expenditures will be reduced, but attempts are being made to increase public revenues to generate a budget surplus.

Certainly there are limits that may not reduce government spending beyond that (for example, due to political and military considerations), but governments can change spending to some extent to reduce inflationary pressures. ..

Public spending becomes more important during depression. There is a distinction between the concept of public spending during depression, the concept of pump priming and therefore the concept of "compensatory spending". Pump priming means that a certain amount of public spending will help the economy recover and gradually reach a satisfactory level of employment and production. This amount of spending is not specific. The idea is that small amounts of public spending may be a good starting point if personal spending is in short supply.

Compensatory spending, on the opposite hand, means public spending with a transparent view of compensating for the decline privately investment. The idea is that if private investment declines, public spending will increase and public compensation spending will continue as long as private spending is below normal. These spending has the synergistic effect of raising the level of income, output and employment.

Compensatory public spending can take the form of relief spending, subsidies, social insurance payments, public works, and so on

The mandatory requirements for compensatory public spending are:

(1) There must be the maximum leverage effect possible.

(2) It shouldn’t be cancelled.

(3) We must create economically and socially desirable assets. However, pump priming spending is less important in developed countries, where investment shortages are not only periodic, but also long-term.

Q5) What does Built-in-Flexibility means?

Ans. One of the practical difficulties of finance is to have enough flexibility to use financial tools quickly and effectively. For example, the tempo of business activity can change suddenly and appear in booms and slumps, but financial tools cannot be adjusted at once to handle such situations. To overcome these practical difficulties, we need to ensure the flexibility built into financial tools.

Flexibility is built into the fiscal system when changes in employment in the economy bring about significant compensatory changes in government revenues and expenditures. The unemployment insurance system has built-in flexibility on both the spending and taxing sides.

As employment increases, the cash spent on dolls is automatically reduced. Price support programs, certain excise taxes, especially those levied on luxury goods, also have some flexibility built in.

However, built-in flexibility may prove inadequate to deal with strong deflationary and inflationary pressures. Therefore, formal flexibility (or flexibility at the discretion of management) is required.

The official system of flexibility provides specific changes in the amount of taxation and government spending required by certain well-recognized issues in business activities. It requires administrative decisions about the necessary changes that must be implemented without delay.

Administrative discretion means delegating to the CEO the authority to order any changes he considers to be compatible with government spending and taxation. These measures are needed to complement the flexibility built into some schemes.

Q6) What is the Purpose of Public Debt?

Ans. In India, most government debt is held in long-term interest-bearing securities such as national savings certificates, local development bonds and capital development bonds. In industrialized nations like the United States, the term government debt or public debt refers to cumulative debt, although the government borrowed it to cover past deficits. In such countries, government debt has a very simple relationship with government deficits, and an increase in debt over a period of time (eg one year) is equal to the current budget deficit. However, in India, this term is used in a different sense.

States usually borrow from the public to meet three types of spending.

To deal with the budget deficit
To cover the costs of war and other unusual situations
Fund development activities.

(A) Public debt to meet the budget deficit:

Whenever public spending exceeds public revenue, it is not always appropriate to make tax changes. You need to make sure that the transaction is casual or regular. If the budget deficit is accidental, it is appropriate to raise a loan to cover the deficit. But if the deficit is a regular feature each year, the state's proper policy is to increase its income or reduce its spending through taxation.

(B) Public debt to respond to emergencies such as war:

In many countries, existing public debt is largely due to war costs. This type of public debt has increased significantly, especially after World War II. Most of India's public debt came to cover the costs of the last war.

During British rule in India, public debt had to be raised to build railroads, irrigation projects and other construction. In the post-independence era, the government borrowed from the public to cover the cost of development work under a five-year plan and other projects. As a result, the amount of public debt is increasing day by day.

Q7)What are the three basic issues when we shift our attention from external debt to internal debt?

Ans. When we shift our attention from external debt to internal debt, we find that the story is different. It causes three problems:

Distortion effect on incentives due to additional tax burden,
To divert the limited capital of society from the productive private sector to the unproductive capital sector.
Shows the economic growth rate.

Let's take a brief look at these three issues.

1. Loss of efficiency and welfare due to taxation:

When the government borrows money from its own people, the government must pay interest on such debt. Interest is paid by imposing taxes on people. Incentives for work and savings can be adversely affected if people need to pay more taxes just because the government has to pay interest on debt. If the same individual was a taxpayer and a bondholder at the same time, it could be a happy coincidence.

But even in this case, the distorted impact of taxes on the inevitable incentives is unavoidable. If the government imposes additional taxes on Mr. X to pay interest, he may have less work and less savings. Either (or both) of the results should be considered a distortion from efficiency and well-being. In addition, if most bondholders are rich and most taxpayers are modest people, paying off debt redistributes income (welfare) from the poor to the rich.

2. Capital displacement (crowding out) effect:

Second, when the government sells bonds and borrows money from the public, the limited capital of society is diverted from the productive private sector to the unproductive public sector. A capital shortage in the private sector will push up interest rates.

In fact, while selling bonds, the government is competing for borrowed money in the financial markets, pushing up interest rates for all borrowers. Due to the large deficit in recent years, many economists are interested in competition for funds. Higher interest rates are also discouraging borrowing for private investment, an effect known as crowding out.

This, in turn, leads to lower economic growth. Therefore, a decline in living standards is inevitable. This seems to be the most serious consequence of large public debt. Paul Samuelson said: "Perhaps the foremost serious consequence of huge amounts of debt is that it replaces capital from the country's wealth stock. As a result, economic growth slows and future living standards decline."

3. Public Debt and Growth:

By diverting the limited capital of society from the productive private sector to the unproductive public sector, debt acts as a slowing factor for growth. Therefore, the economy grows much faster in the absence of public debt than in the absence of debt.
Considering all the implications of government debt on the economy, we can see that large amounts of public debt can have a negative impact on long-term economic growth. Figure 22.3 shows the relationship between growth and debt. Suppose the economy runs debt-free for a long time. In that case, the capital stock and potential GDP follow the virtual path shown by the solid line in the figure.

Now let's say the government has increased its huge deficit and debt. More and more capital is being replaced over time as debt accumulates, as shown by the dashed capital line at the bottom of Figure 22.3. As the government imposes additional taxes on people to pay interest on debt, there is greater inefficiency and distortion, which further reduces production.

More seriously, rising external debt lowers national income and increases the proportion of GNP that must be secured each year to repay external debt.

Q8. How does national debt put a burden on taxpayers and future generations?

Ans. One of the most obvious and important burdens on government bonds is the interest that must be paid to borrow and maintain debt of this size. The interest burden on government bonds accumulates as additional debt is incurred each year. The debt has not been repaid, so interest must be paid annually.

The increased burden of debt repayment, or the cost of interest to maintain the debt, will be passed on to future generations who will have to pay interest on the current debt. But at the same time, many of the people who pay interest are Indians who own government bonds

Should we pay off the debt?

First of all, raising the amount needed to repay debt through taxes and other income can be a huge, perhaps impossible burden, even for years. Second, as debt repayments increase tax burdens, average taxpayers become poorer and government bond holders become richer with newly redeemed funds, resulting in significant income redistribution.

In addition, some of the debt is external or foreign-affiliated. Under normal circumstances, this is not a serious concern, but it does mean a significant outflow of rupees from India during periods of accelerated repayment. Finally, a set of surplus budgets will be needed to repay public debt.

However, as Keynes pointed out, surplus budgets have a diminishing impact on the economy. Economic activity will decline while debt is being repaid. In short, the opportunity cost of cutting government bonds will slow down economic activity.

Q8) What is Public Debt Management?

Ans. Public debt management is the process of establishing and implementing strategies to ensure that governments do so.

Financing needs and their obligations to pay are met at the lowest possible cost in the medium to long term. Consistent with the degree of cautious risk 12. It is important that public debt management is also clearly linked

A macroeconomic framework to ensure that public debt growth is sustainable. The complexity of public debt management depends largely on the size and structure of the economy. Domestic securities market, government structure promoting public debt, economic resilience

Not only absorb shocks (natural disasters, global financial crises, etc.), but also the country's international.

Q9) Mention the Four Key Concepts of Public Debt Management.

Ans. Public debt management consists of designing credit contracts with medium- to long-term plans. Four important concepts must be included (ISSAI 5422): 13 Governance

Debt structure by currency, holder, rate, terms, commodities and contractors entity
Contract risk assessment
Careful management practices Monitoring and reporting
Process recording, control, and monitoring.

The first three concepts relate to governance issues and the fourth concept is monitoring report.

Key Concept 1: Debt structure by currency, holder, rate, terms and commodities

Contractor entity

Key Concept 2: Debt Contract Risk Assessment

Risk assessment is the process by which situations or events occur that can interfere with the debt specified in the debt.

Not only does it define that the contract is fulfilled, but it also defines the probability that those situations or events will occur.

Common risks of bond management are market risk, rollover risk, liquidity risk, and unattainable risk.

Desirable financial revenue targets (tax and non-tax revenue), credit risk, settlement risk, natural disaster risk,

Country risk and operational risk. Operational risk is related to:

The functions and responsibilities of the staff in charge of debt management are not clear
Lack of expertise and training
Lack of written procedures or instructions
Documenting risk
Risk of fraud.

These operational risks are primarily related to the internal control of government agencies responsible for public debt.

Key Concept 3: Careful management practices

Careful management practices should include:

Legal framework
A framework for comparing risk and cost
Defined contingent liability or liability
Strategies that demonstrate debt management measures are associated with a robust macroeconomic framework.

Key Concept 4: Process Recording, Control, and Monitoring

Achieving sound debt management practices requires reliable and accurate information about external debt.

To measure and assess the risks that governments may face and to make informed decisions. In summary, public debt management is important for several reasons.

To ensure that the level and rate of public debt growth is sustainable in a wide range of situations
Reduce public borrowing costs, reduce the impact of deficit finance, contribute to debt and finance sustainability
. Avoid economic crises due to unstructured external debt

Q10) State the Purpose of taxation.

Ans. During the 19th century, the general idea was that taxes should serve primarily to fund the government. Once and today, governments have used taxation for more than just financial purposes. One useful way to look at the purpose of taxation due to American economist Richard A. Musgrave is to distinguish between the purposes of resource allocation, income redistribution, and financial stability. Unless there is a strong reason for interference, such as the need to reduce pollution. Allocation is further promoted if the original purpose, the resource tax system, does not interfere with the allocation determined in the market. The second purpose, income redistribution, is to reduce inequality in the distribution of income and wealth. The purpose of stabilization is to maintain high employment and price stability, implemented through taxation, government spending policy, monetary policy and debt management.

Conflicts can arise between these three purposes. For example, resource allocation may require changes in tax levels and / or composition, but these changes can have a significant impact on low-income households, so redistribution. The goal is confusing.

Q11) What are the types of tax?

Ans. Direct tax and indirect tax

In the financial literature, taxes are categorized in different ways by who pays, who bears the ultimate burden, how much the burden can be shifted, and various other criteria. An example of the former type is income tax and an example of the latter is sales tax. and it is not clear which category a particular tax, such as corporate income tax or property tax, should fall into. Direct taxes are generally said to be taxes that taxpayers cannot transfer to others, but indirect taxes can.

Direct tax

Direct taxes are primarily taxes on natural persons (such as individuals) and are usually based on the taxpayer's solvency as measured by income, consumption, or net worth. Below is a description of the main types of direct tax.

Personal income tax is usually levied on the total net income of the taxpayer (which may be an individual, a couple, or a family member) in excess of the prescribed minimum amount. It is also generally adjusted for situations that affect solvency, such as family status, number and age of children, and financial burden from illness. Taxes are often levied at gradual rates. In other words, as income goes up, so does the tax rate. Personal exemptions for taxpayers and their families can create a range of income that is subject to a zero tax rate.

Taxes on net worth are levied on the total net worth of an individual, that is, the value of the asset minus the liability. As with income tax, you can take into account the taxpayer's personal circumstances.

Personal or direct taxes on consumption (also known as spending tax or spending tax) are basically levied on all income that is not devoted to savings. In contrast to indirect taxes such as sales tax, direct sales tax can be adjusted to suit the individual's ability to pay, taking into account marital status, age, number of dependents, and so on. Although long appealing to theorists, this form of tax is only used in two countries, India and Sri Lanka. Both instances failed in a short amount of time. By the end of the 20th century, "flat tax", which achieves the same economic effect as direct sales tax by exempting most income from capital, became popular with tax professionals. Many countries have only one tax rate of income tax, but no country has a flat tax based tax.

Taxes at the time of death take two forms: inheritance tax (taxable is a bequest received by the heir) and inheritance tax (subject to total property left by the deceased). Inheritance tax may take into account the taxpayer's personal circumstances, such as the relationship between the taxpayer and the donor before receiving the bequest and net worth. However, inheritance tax is generally graded according to the size of the property, and some countries offer tax-exempt remittances to spouses, taking into account the number of heirs involved. To prevent inheritance tax from being circumvented by the exchange of property before death, the tax system may include a tax on gifts that exceed certain thresholds made between living people (gift tax). See). Taxes on transfers usually do not generate a lot of income just because you can easily avoid paying large taxes through asset planning.

Indirect tax

Indirect taxes are levied on transactions involving the production and consumption of goods and services, or imports and exports. Examples include general and selective sales tax, value added tax (VAT), taxes on all aspects of manufacturing or production, taxes on legal transactions, customs duties or import taxes.

General sales tax is a tax that applies to a significant portion of consumer spending. You can apply the same tax rate to all taxable items, or you can apply different tax rates to different items (such as food and clothing). One-step taxes can be collected at the retail level, as in US states, or at the pre-retail (manufacturing or wholesale) level, as they occur in some developing countries. Multi-level taxes are applied at each stage of the production-distribution process. VAT, which became popular in the second half of the 20th century, is generally collected by allowing taxpayers to deduct purchase tax deductions from their sales responsibilities. VAT has replaced sales tax. This is a tax at each stage of the production and distribution chain, there is no tax reduction paid at the previous stage. The cumulative effect of sales tax, commonly known as the tax cascade, distorts economic decisions.

Generally applicable to a wide range of products, sales tax may exempt low-income households from necessities to reduce the tax burden. By comparison, excise tax is only levied on certain goods or services. Excise and tariffs are levied on almost everything from essentials such as bread, meat and salt to essentials such as tobacco, wine, liquor, coffee and tea, and luxury items such as jewelry and fur in some countries. .. Product groups such as alcoholic beverages, tobacco products and automotive fuels generate most of the excise tax revenue in most countries. Centuries ago, taxes on durable consumer goods were applied to luxury goods such as pianos, saddle hoses, carriages and pool tables. Today, the main luxury tax is on automobiles. This is primarily because registration requirements make it easier to manage taxes. In some countries, gambling is taxed, state-owned lottery tickets have the same effect as excise tax, and the government's "take" is effectively a tax on gambling.

Some excise taxes and customs duties are specific. That is, it is taxed based on the number, weight, length, quantity, or other specific characteristics of the taxable goods or services. Other excise taxes, such as sales tax, are ad valorem taxes and are levied on the value of the goods measured at the price. Legal transactions are taxed on the issuance of shares, the sale (or transfer) of homes and land, and transactions on the stock exchange. For administrative reasons, it often takes the form of stamp duty. That is, legal or commercial documents are stamped to indicate tax payments. Many tax analysts consider stamp duty to be a nuisance tax. They are most often found in developing.

Q12)What are the basic four Taxation principles?

Ans In The Wealth of Nations (Volume 5, Chapter 2), he set four general norms.

All state themes should contribute as much as possible to government support in proportion to their capabilities. In other words, in proportion to the income each enjoys under the protection of the state ...
The taxes that each individual is obliged to pay must be certain, not arbitrary. The time of payment, the method of payment, and the amount paid must all be clear and obvious to the contributor and everyone else. ...
All taxes should be levied at that time or in the manner most likely to be most convenient for the contributor to pay. ...
All taxes should be devised to be out of people's pockets and as low as possible, in addition to what it brings to the country's public finances. ...

These principles hold surprising relevance, although they need to be reinterpreted from time to time. From the beginning, we can draw some key views on what is fair in the distribution of tax burdens between taxpayers. These are: (1) The belief that taxes should be based on the solvency of the individual, known as the principle of tax-bearing power, and (2) the benefit principle, the idea that there should be some equivalence between the contents of the individual. And the benefits received from subsequent government activities. The fourth of Smith's criteria can be interpreted as being rooted in the fact that many economists focus on a tax system that does not interfere with market decision-making, and that the need to avoid complexity and corruption is more apparent.

Distribution of tax burden

Various principles, political pressures, and goals can guide a government's tax policy. The following is a discussion of some of the key principles that can shape tax decisions.

Horizontal fairness

The principle of horizontal equity assumes that persons in the same or similar position (for tax purposes) are subject to the same tax obligations. In practice, this principle of equality is often ignored, intentionally or unintentionally. Intentional breaches are usually motivated by politics rather than sound economic policy (eg, tax incentives given to farmers, homeowners, or members of the general middle class, interest on government securities. Exclusion). .

Principle of tax-bearing power

The principle of tax-bearing power requires that all relevant personal characteristics be taken into account and distributed among individuals according to their ability to bear the total tax burden. The most appropriate taxes from this perspective are personal taxes (income tax, net worth tax, sales tax, inheritance tax). Historically, there was a common consensus that income was the best indicator of solvency. However, there was significant disagreement with this view, including the number of 17th-century British philosophers John Locke and Thomas Hobbes, as well as current tax experts. Early opponents believed that fairness should be measured by what was used (that is, consumption), not what was earned (that is, income). Modern proponents of sales tax emphasize the neutrality of sales tax on savings (income tax distinguishes savings), the simplicity of sales tax, and the superiority of consumption as a measure of an individual's ability to pay for life.

Wealth is a good measure of solvency, as some theorists say that assets mean some degree of satisfaction (power) and taxability, even if they do not generate concrete income (as in the case of art collections). I believe in providing.

The principle of tax-bearing power is also generally interpreted as requiring direct personal tax to have a progressive tax structure, but there is no way to show that a certain degree of progressiveness is correct. Some tax theorists say that such taxes are supplemented by direct income transfer or negative income tax (or refundable credits), as a significant portion of the population does not pay certain direct taxes such as income tax or inheritance tax. We believe that a satisfactory redistribution can only be achieved if it is done). Others argue that income transfers and negative income taxes create negative incentives. Instead, they favor public spending on low-income households (eg health and education) as a better way to reach distribution goals.

Indirect taxes such as VAT, excise tax, sales tax and sales tax can meet the criteria for solvency, but their scope is limited. For example, exempt food and other necessities, or distinguish tax rates according to "urgency." Needed. Such policies are generally not very effective. In addition, they distort consumer purchasing patterns, and their complexity often makes it difficult to get started.

Throughout most of the 20th century, there was a general opinion that the distribution of tax burdens between individuals should reduce the income inequality that naturally arises from the market economy. This view was completely contrary to the liberal view of the 19th century that income distribution should remain the same. However, by the end of the 20th century, many governments will use taxes for redistribution purposes, recognizing that trying to use taxes to reduce inequality can result in costly distortions. I have partially returned to the view that it should not be.

Benefit principle

Under the Benefit Principle, taxes are considered to perform a function similar to the price of private transactions. This helps the government decide what activities to do and who will pay for them. If this principle can be implemented, the allocation of resources through the public sector will directly meet the needs of consumers.

In fact, it is difficult to implement the benefit principle in most public services, as citizens generally do not tend to pay for publicly provided services such as police. The Benefit Principle is best used to finance roads and highways through taxation of vehicle fuel and road user tolls (tolls). The payroll tax used to raise social security may also reflect the link between benefits and "contributions", but contributions are in the accounts held for individual contributors. This link is generally weak because it doesn't fit.

Economic efficiency

The requirement that the tax system be efficient arises from the nature of the market economy. There are many examples of the opposite, but economists generally believe that markets do a pretty good job of making economic decisions about choices such as consumption, production and financing. Therefore, they feel that the tax system should generally refrain from interfering with the allocation of economic resources in the market. In short, taxation should minimize interference with individual decisions. You must not discriminate in favor of or against a particular consumer spending, a particular means of production, a particular organizational structure, or a particular industry. Of course, this does not mean that key social and economic goals may not take precedence over these considerations. For example, it may be desirable to tax pollution as a means of protecting the environment.

Economists have developed techniques to measure the "overburden" that occurs when taxes distort economic decision making. The basic idea is that if a tax impact costs $ 2 to produce a product for only $ 1.80, you will have an overburden of 20 cents. A more neutral tax system will have less distortion. Therefore, an important post-war development in taxation theory is the development of optimal taxation, the decision of tax policy to minimize overburden. Being dealing with a highly stylized mathematical description of the economic system, this theory goes beyond the important insight that supply and demand do less damage if supply and demand are less sensitive to such distortions. , Does not provide a prescription that can be easily applied to the policy. Attempts have also been made to incorporate distribution considerations into this theory. They face the challenge of not having a scientifically correct income distribution.