Government Effects on the Distribution of Income: An Overview

A government’s role, as it relates to taxation and public spending, has never gone unquestioned. Controversy arises from conservatives advocating fiscal responsibility and limited government intervention in a market economy. This supports the notion that taxes should be levied at the lowest possible level, specifically designated for the financing of the few public goods that only government can provide. However, there are advocates supporting an expanded role for government and arguing in favor of higher taxes to finance more public goods. They also argue for a social protection system of redistributive schemes that, to some extent, will correct the stark inequities in our society. Public provisioning of goods and services and redistribution policy can be defined according to different criteria, some of which have real economic significance while others are matters of convention and convenience. In general, `public spending can be wise or foolish, appropriate or inappropriate, effective or ineffective but—the paradox first pointed out by Keynes—it cannot be more costly to the economy as a whole than doing nothing’ (Nell, 1988, p. 228).