Difficulties of Allocation of Income
Difficulties of Allocation of Income
1. It is possible in the incorporated sector to allocate separately income amongst factors of production in the form of rent, wages, interest and profit. In case of un incorporated sector of production, i.e. self –employed persons in one-man business or partnership, the earned income is a mixture of rent, wages, interest and profit. Here it is a problem to allocate income amongst factors. For sake of convenience, all such income are taken as mixed income.
2. Some business enterprises due to their monopolistic position can increase price without its effect on demand of the product. This increases their profits. The allocation of such profits is a problem and cannot be determined by any economic reasons.
3. During inflation, profits rise much more than wages, rent and interest. Hence is allocation is difficult.
4. In underdeveloped countries there are many small shopkeepers and professionals who do not maintain any account of their income. This poses another problem of allocation of income among factors.
5. The production of goods kept for self-consumption actually generates income. But the imputed values though included in national income, creates a problem of determining its amount and allocation of income amongst factors.
Precautions
The following precautions are to be taken while estimating factor income
- All transfer income should be excluded.
- Income earned through illegal means like smuggling, thief etc. should be excluded.
- Windfall gains like income from lotteries should be excluded.
- Corporation tax is a part of profits and should be included.
- Death duties, gift tax, wealth tax, tax on windfall gains are paid from wealth or past savings of the tax payer. Since they are not paid from the current income of the tax payer, they are to be excluded from national income.
- Consumption of fixe capital is not taken into account as capital goods are not produced during the current year. Hence in income method, we only estimate net national income.
- The sale proceeds from the transaction of second hand goods are not included in the estimation of national income.
- Indirect taxes like sales tax, excise duty are not included while estimating national income at factor cost.
- Income tax is paid out of the compensation of employees. It should not be separately added.
