Redistribution of income and wealth

U.S. mean family net worth by percentile of net worth (1989–)

Redistribution of income and redistribution of wealth are respectively the transfer of income and of wealth (including physical property) from some individuals to others by means of a social mechanism such as taxation, monetary policies, welfare, land reform, charity, confiscation, divorce or tort law.[1] The term typically refers to redistribution on an economy-wide basis rather than between selected individuals, and it typically refers to redistributions from those who have more to those who have less.

The desirability and effects of redistribution are actively debated on ethical and economic grounds. The subject includes analysis of its rationales, objectives, means, and policy effectiveness.[2][3]

Types of redistribution

Today, income redistribution occurs in some form in most democratic countries. In a progressive income tax system, a high income earner will pay a higher tax rate than a low income earner. Another taxation-based method of redistributing income is the negative income tax.

Two other common types of governmental redistribution of income are subsidies and vouchers (such as food stamps). These transfer payment programs are funded through general taxation, but benefit the poor, who pay fewer or no taxes. While the persons receiving transfers from such programs may prefer to be directly given cash, these programs may be more palatable to society than cash assistance, as they give society some measure of control over how the funds are spent.[4]

The difference between the Gini index for the income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.

Wealth redistribution can be implemented through land reform that transfers ownership of land from one category of people to another, or through inheritance taxes or direct wealth taxes. Before-and-after Gini coefficients for the distribution of wealth can be compared.

Objectives

The objectives of income redistribution are varied and almost always include the funding of public services. Supporters of redistributive policies argue that less stratified economies are more socially just.[5]

One basis for redistribution is the concept of distributive justice, whose premise is that money and resources ought to be distributed in such a way as to lead to a socially just, and possibly more financially egalitarian, society. Another argument is that a larger middle class benefits an economy by enabling more people to be consumers, while providing equal opportunities for individuals to reach a better standard of living. Seen for example in the work of John Rawls, another argument is that a truly fair society would be organized in a manner benefiting the least advantaged, and any inequality would be permissible only to the extent that it benefits the least advantaged.

Some proponents of redistribution argue that capitalism results in an externality that creates unequal wealth distribution.[6] Studies show that a lower rate of redistribution in a given society increases the inequality found among future incomes, due to restraints on wealth investments in both human and physical capital.[7]

Some argue that wealth and income inequality are a cause of economic crises, and that reducing these inequalities is one way to prevent or ameliorate economic crises, with redistribution thus benefiting the economy overall. This view was associated with the underconsumptionism school in the 19th century, now considered an aspect of some schools of Keynesian economics; it has also been advanced, for different reasons, by Marxian economics. It was particularly advanced in the US in the 1920s by Waddill Catchings and William Trufant Foster.[8][9] There is currently a great debate concerning the extent to which the world's extremely rich have become richer over recent decades. Thomas Piketty's Capital in the Twenty-First Century is at the forefront, critiqued in certain publications such as The Economist. [10]

Moral obligation

Peter Singer argument contrasts to Thomas Pogge's in that he states we have an individual moral obligation to help the poor.[11][12]

'Min-max criterion' for social welfare

One way of measuring societal well-being is the social welfare function, or the concept that society’s utility is made up in some way through the utilities of its individuals. At one polar extreme of the possible social welfare functions is the 'min-max' or 'minimax' function:

W = \min(Y_1, Y_2, \cdots, Y_n)

This states that the welfare (utility) W of society is dependent solely on the welfare YI of the lowest-welfare individual (Yi), or in terms of income, the income of the lowest-income individual.

Economic effects of inequality

Number of high-net-worth individuals in the world in 2011[13]

Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett show a correlation between income inequality and higher rates of health and social problems (obesity, mental illness, homicides, teenage births, incarceration, child conflict, drug use), and lower rates of social goods (life expectancy, educational performance, trust among strangers, women's status, social mobility, even numbers of patents issued per capita), on the other.[14] The authors argue inequality leads to the social ills through the psychosocial stress, status anxiety it creates.[15]

A 2011 report by the International Monetary Fund by Andrew G. Berg and Jonathan D. Ostry found a strong association between lower levels of inequality and sustained periods of economic growth. Developing countries (such as Brazil, Cameroon, Jordan) with high inequality have "succeeded in initiating growth at high rates for a few years" but "longer growth spells are robustly associated with more equality in the income distribution."[16][17]

Criticism

Public choice theory states that redistribution tends to benefit those with political clout to set spending priorities more than those in need, who lack real influence on government.[18]

See also

Lists:

Opposite tendencies:

References

  1. ↑ "Redistribution". Stanford Encyclopedia of Philosophy. Stanford University. 2 July 2004. Retrieved 13 August 2010. The social mechanism, such as a change in tax laws, monetary policies, or tort law, that engenders the redistribution of goods among these subjects
  2. ↑ F.A. Cowell ([1987] 2008). "redistribution of income and wealth,"The New Palgrave Dictionary of Economics, 2nd Edition, TOC.
  3. ↑ Rugaber, Christopher S.; Boak, Josh (January 27, 2014). "Wealth gap: A guide to what it is, why it matters". AP News. Retrieved January 27, 2014.
  4. ↑ Harvey S. Rosen & Ted Gayer, Public Finance pp. 271–72 (2010).
  5. ↑ Redistribution (Stanford Encyclopedia of Philosophy)
  6. ↑ Marx, K. A Contribution to the Critique of Political Economy. Progress Publishers, Moscow, 1977
  7. ↑ http://www.jstor.org/stable/117283 Unequal Societies: Income Distribution and the Social Contract.
  8. ↑ (Dorfman 1959)
  9. ↑ Allgoewer, Elisabeth (May 2002). "Underconsumption theories and Keynesian economics. Interpretations of the Great Depression" (PDF). Discussion paper no. 2002-14.
  10. ↑ Forget the 1%; Free Exchange, The Economist, 8 November 2014, p79.
  11. ↑ Famine, Affluence, and Morality
  12. ↑ Fighting Poverty
  13. ↑ http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf
  14. ↑ Statistics and graphs from Wilkinson and Pickett research.
  15. ↑ The Spirit Level: how 'ideas wreckers' turned book into political punchbag| Robert Booth| The Guardian| 13 August 2010
  16. ↑ Inequality and Unsustainable Growth: Two Sides of the Same Coin? Andrew G. Berg and Jonathan D. Ostry| IMF STAFF DISCUSSION NOTE | April 8, 2011
  17. ↑ Berg, Andrew G.; Ostry, Jonathan D. (2011). "Equality and Efficiency". Finance and Development (International Monetary Fund) 48 (3). Retrieved September 10, 2012.
  18. ↑ Plotnick, Robert (1986) "An Interest Group Model of Direct Income Redistribution", The Review of Economics and Statistics, vol. 68, #4, pp. 594–602.

External links