Redistribution (economics)

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In economics, redistribution is the transfer of income, wealth or property from some individuals to others.

One premise of redistribution is that money should be distributed to benefit the poorer members of society, and that the rich have an obligation to assist the poor, thus creating a more financially egalitarian society.^{[citation needed]} Another argument is that the rich exploit the poor or otherwise gain unfair benefits. 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.^{[citation needed]}

Some proponents of redistribution argue that capitalism results in an unequal wealth distribution.^{[citation needed]} They also argue that economic inequality contributes to crime. There is also the issue of equal opportunity to access services such as education and health care. Also, the law of diminishing returns is cited, with the interpretation that the loss to the wealthy in the form of taxation is proportionately less than the gain to the poor from social programs. Another argument is that the rich should pay higher taxes because they receive greater benefits from the protection of the government; they have more property, and therefore more assets for the government to defend.

Studies show that a lower rate of redistribution in a given society increases the inequality found among future incomes.^{[citation needed]} This is caused by restraints on wealth investments in both human and physical capital.^[1] A steeper progressive income tax results in more equal distribution of income and wealth across the board. Roland Benabou states that greater inequality and a lower redistribution rate decreases the likelihood that the lower class will register to vote.^[1] Benabou does not find a relationship between levels of inequality and government welfare transfers to the needy.^[1]

Contents 1 Types of redistribution 2 POUM Hypothesis 3 Criticism 4 See also 5 References 6 External links

[edit] Types of redistribution

Income redistribution evens the amount of income that individuals are permitted to earn, in order to correct the ineffectiveness of a market economy to remunerate based on the amount of labor expended by an individual.^{[citation needed]} The objective of moderate income redistribution is to avoid the unjust equalization of incomes on one side and unjust extremes of concentration on the other sides. Today, income redistribution occurs in some form in most democratic countries, most commonly through income-adjusted taxes (in which the amount of tax paid is directly connected to one's income), some of which goes to fund welfare programs to assist the poor, or to all of society. progressive income taxes are a widely used method of income redistribution. The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such a taxation.

The phrase redistribution of wealth specifically refers to when assets are seized from one entity and redistributed to another entity in order to achieve economic equality (eg. land being taken from feudal lords and given to serfs).^{[citation needed]} All political and economic systems facilitate the transfer of wealth, including capitalism, communism and socialism; however the favored method of redistribution varies from system to system. Some methods of redistributing wealth are welfare, nationalization and taxation.

Property redistribution is a term applied to various political policies involving taxation or expropriation of property, or of regulations ordering owners to make their property available to others. Public programs and policy measures involving redistribution of property include eminent domain, land reform and inheritance tax. Redistribution policies are usually promoted (in democracies) by arguing that less stratified economies are more socially just.^[2]

[edit] POUM Hypothesis

The POUM (Prospect Of Upward Mobility) hypothesis is an argument that explains why the poor and working class do not support efforts by governments to redistribute wealth. It states that people with below average income do not support higher tax rates because of their belief in the prospect for upward mobility.^[3] These workers strongly believe that there is opportunity for either themselves, their children, or their grandchildren to move upward on the economic ladder.

There are three key assumptions that form the foundation for the POUM hypothesis. First, one must assume that policies that are enacted in the present will endure into the future and carry enough weight to impact the future.^[3] This is important because workers with lower than average incomes believe in the possibility that their offspring will eventually achieve entrance into higher income brackets. Second, one must assume that poorer workers are "not too risk averse".^[3] This assumption rests on the fact that the people in question must realize that their income may also go down instead of up. Finally, poor workers must have an optimistic view of their future, as they expect to go from poorer than the average to richer than average.^[3] These three assumptions work together to create a poorer than average worker that rejects the redistribution of wealth based on the possibility that their offspring will reach the upper ranks of income and wealth. In which case, their offspring would not benefit from higher tax rates and redistribution.

After much analysis of the POUM hypothesis, Benabou and Ok recognize two key limitations. One limitation is that other potential problems that create more concavity in the POUM system, such as risk aversion, must not increase too much.^[3] Concavity must be kept at a minimum to ensure that the POUM hypothesis generates the expected results. The other limitation is that there must be adequate commitment to the choice of fiscal policy including the government and institutions.^[3]

[edit] Criticism

Conservative and Classical liberal arguments against property redistribution consider the term a euphemism for theft, and argue that redistribution of legitimately obtained property cannot ever be just.^[4] 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.^[5]

In the United States, some of the founding fathers and several subsequent leaders expressed opposition to redistribution of wealth. Samuel Adams stated: "The utopian schemes of leveling [redistribution of wealth], and a community of goods, are as visionary and impracticable as those which vest all property in the Crown. [These ideas] are arbitrary, despotic, and, in our government, unconstitutional."^[6]

United States President Grover Cleveland vetoed an expenditure that would have provided $10,000 of federal aid to drought-stricken Texas farmers. When explaining to congress why such an appropriation of taxpayer money was inappropriate, he stated:

I can find no warrant for such an appropriation in the Constitution; and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadily resisted, to the end that the lesson should be constantly enforced that, though the people support the Government, the Government should not support the people. ... The friendliness and charity of our fellow countrymen can always be relied on to relieve their fellow citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.^[7]

[edit] See also

• Basic income
• Communism
• Egalitarianism
• Hawaii Housing Authority v. Midkiff
• Nationalization
• Ownership
• Progressive taxation
• Redistribution
• Robin Hood effect
• Sabbath economics
• Social equality
• Social inequality
• Social liberalism
• Socialism
• Tax
• Wealth inequality in the United States
• Welfare state

[edit] References

[edit] External links

• Small calculus of inequality measures