<p>To narrow down the focus of the question, I want to know how would one depict a reduction of indirect taxes on the Lorenz Curve of a country. In my opinion, the reduction of taxes will increase the level of inequity and so the Gini Index must increase. Thus, the initial Lorenz Curve of a country must shift outwards. However, I came across a problem where the very opposite has been done. Please explain the flaw in my reasoning. </p>

<p>For more clarity the question is laid out as follows:</p>

<p><strong>Introduction</strong></p>

<p><a href="https://i.sstatic.net/YKB8G.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/YKB8G.png" alt="enter image description here"></a></p>

<p><strong>Main Question</strong></p>

<p><a href="https://i.sstatic.net/FNfoo.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/FNfoo.png" alt="enter image description here"></a></p>

<p><strong>Answer</strong></p>

<p><a href="https://i.sstatic.net/YGq9O.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/YGq9O.png" alt="Diagram"></a> </p>

CC BY-SA 3.0
2016-04-18T11:48:47.130Z
What happens to the rest of the system? Are direct taxes increased accordingly to make up the shortfall, or does the budget deficit increase, or the budget surplus decrease, is some spending cut, or is the gap filled by money-printing?
410 gone
CC BY-SA 3.0
2016-04-18T11:59:25.063Z
There is no other information given and I don't think that we are allowed to make assumptions. Do you think that the answer is correct, with all the information that I've given?
Student
CC BY-SA 3.0
2016-04-18T13:15:16.220Z
@User-3.14 It is difficult to judge what a professor will accept as a correct answer unless the exact model used is identified.
Giskard
CC BY-SA 3.0
2016-04-18T13:35:55.853Z
@EnergyNumbers, I've added the full information. Perhaps this will help in clearing some ambiguity.
Student
<macroeconomics>
What are the likely effects on the distribution of income if the rate of indirect tax is reduced?
Student
# What are the likely effects on the distribution of income if the rate of indirect tax is reduced?

(Asked by: username_0 on 2016-04-18)

To narrow down the focus of the question, I want to know how would one depict a reduction of indirect taxes on the Lorenz Curve of a country. In my opinion, the reduction of taxes will increase the level of inequity and so the Gini Index must increase. Thus, the initial Lorenz Curve of a country must shift outwards. However, I came across a problem where the very opposite has been done. Please explain the flaw in my reasoning.

For more clarity the question is laid out as follows:

**Introduction**

[![enter image description here](https://i.sstatic.net/YKB8G.png)](https://i.sstatic.net/YKB8G.png)

**Main Question**

[![enter image description here](https://i.sstatic.net/FNfoo.png)](https://i.sstatic.net/FNfoo.png)

**Answer**

[![Diagram](https://i.sstatic.net/YGq9O.png)](https://i.sstatic.net/YGq9O.png)

**Tags:** macroeconomics
> **Comments:**
> **username_1**: What happens to the rest of the system? Are direct taxes increased accordingly to make up the shortfall, or does the budget deficit increase, or the budget surplus decrease, is some spending cut, or is the gap filled by money-printing?  
> **username_0**: There is no other information given and I don't think that we are allowed to make assumptions. Do you think that the answer is correct, with all the information that I've given?  
> **username_2**: @User-3.14 It is difficult to judge what a professor will accept as a correct answer unless the exact model used is identified.  
> **username_0**: @EnergyNumbers, I've added the full information. Perhaps this will help in clearing some ambiguity.  

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## 0 answers

