Question

explain how government policies that redistribute income from the rich to the poor might reduce efficiency.

Answer 1

Government through progressive taxation, i.e by increasing the marginal tax rate with increase in the income levels, tax more the rich or the higher strata, the philosophy behind this is that higher income groups should contribute more towards the development of nation, social work etc. But such policies appear to be partial with respect to the higher income groups, or in short it demotivates them to invest and increase the level of production, because there is very little to gain from it, thus they tends to decrease there levels of production, they minimize spending upon technology, they decrese there working staff, therefore affecting the overall efficiency.