Many governments counteract high inequality
in private sector incomes through their tax
and transfer systems, and achieve a more
equitable income distribution through two
principal mechanisms
• First, social security systems
generally
have a redistributive impact, since transfer
payments – such as unemployment
benefits, child and family allowances,
and social retirement benefits –
disproportionately benefit those with the
lowest private sector incomes.
• Second, under most tax systems those
with high incomes pay proportionately
higher income taxes than those with
lower incomes. Therefore, progressive
taxation narrows the gap between rich
and poor households and reduces income
inequality