ABSTRACT
This chapter explains how government policies can redistribute income. Consistent with the economic approach to everything, the analysis in the chapter emphasizes not only the impact of the policy on the size of the slices distributed to everyone, but also the potential trade-offs involved. Mainstream opinion within the economics profession holds that attempts to equalize the size of the slices may lead to a reduction in the size of the pie. Positive economic analysis can address two aspects of taxes and transfers, namely, their incidence and impact on incentives. The incentive issue is essentially the impact of taxes on work, saving, and investment. The grand spectrum of incentives also includes moral and social incentives. Moral incentives reflect the fundamental beliefs that people have about right and wrong. The chapter discusses the relationship between the size of the slices and how rapidly the size of the pie expands.
