Transfer payments are moneys transferred from one person or group to another (e.g. from the government to individuals) without production taking place.
Transfer payments are payments from tax revenue that are received by certain members of the community.
They are not made through the market, as no production takes place.
Their function is to provide a more equitable distribution of income. The main recipients are vulnerable groups such as the elderly, the disabled, the unemployed and the very poor.
Payments tend to transfer income from those able to work and pay taxes to those unable to work or in need of assistance.
old age pensions
The extent to which transfer payments can be paid is heavily dependent on how much tax is collected and how many people have paid tax.
Direct provision of goods and services
A further way of reducing inequalities in society is for the government to provide certain important services free of charge to the user.
Such services are financed through the tax system. If such services are used equally by all citizens, then those on lowest incomes gain most as a percentage of their income – thereby lowering inequality. The two most common examples of such free provision in many economies are merit goods, such as health care and education