Question

Consider a decrease in the capital gains tax rate and an increase in the earned income tax credit.

a) What is the effect of each of these on income distribution?

b) Would you support either one? Why or why not?

Answer 1

a) Decrease in capital gains tax rate will result in higher earnings from financial assets and long term capital investments
Where as increase in earned income tax credit will result in higher disposable income for household and working class people.
Increase in earned income tax will have a more positive effect on income distribution since wage earners and working class people will have a higher disposable income. Decrease in capital gains tax rate will lead to a rise in long term investments but it wouldn't have a very significant impact on income distribution since it will be beneficial to people with higher income and a good financial corpus.
b) Decrease in capital gains tax rate is more effective wealth creation and increase in income tax credit is more effective in wealth distribution if people with lower incomes get a higher tax credit than people with lower income.