Redistribution of income and wealth

(Redirected from Redistribution (economics))
U.S. mean family net worth by percentile of net worth (1989–2010).

Redistribution of income and wealth or redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, charity, divorce or tort law.[1] 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]

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. 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 taxation.

 “ Money is like muck, not good except it be spread. ” —Francis Bacon, 'Of seditions and Troubles', Essays, 15.

Property redistribution is a term applied to various policies involving taxation or nationalization 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, inheritance tax and certain provisions found in family law.

Two common types of governmental redistribution of wealth are subsidies and vouchers (such as food stamps). These "transfer payment" programs are funded through general taxation, but disproportionately benefit the poor, who pay fewer or no taxes. While the persons receiving redistributions from such programs may prefer to be directly given cash, these programs may be more palatable to society, as it gives society some measure of control over how the funds are spent.[3]

Supporting arguments

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.[4]

One basis for redistribution is the concept of distributive justice and wealth. 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] This argument rests on the social welfare function, or the concept that society’s utility is made up in some way through the utilities of its individuals. Particularly the Max-Min or Maximin Criterion for social welfare explains this concept:

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

This states that the utility of society (W) is dependent on that of the least (min) individual (Yi), or in terms of income, the poorest individual. In this case, society would want to distribute income to the poorest individuals until all incomes were equal.

Another argument is that the rich exploit the poor or otherwise gain unfair benefits[citation needed], and thus should return some of those 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 externality that creates unequal wealth distribution.[5] They also argue that economic inequality contributes to crime[citation needed]. There is also the issue of equal opportunity to access services such as education and health care. 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.[6] Roland Benabou states that greater inequality and a lower redistribution rate decreases the likelihood that the lower class will register to vote.[6] Benabou does not find a relationship between levels of inequality and government welfare transfers to the needy.[6]

Some[who?] 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[citation needed], there being synergies[citation needed]. This view was associated with the underconsumptionism school in the 19th century, now considered an aspect of some schools of Keynesian economics[citation needed]; 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.[7][8]

A system with no redistribution of wealth which adds some measure of redistribution may actually experience a Pareto Improvement, meaning that no persons within the system are worse off and at least one person is better off. Such an outcome is most likely if all high-income people in the system are altruistic in nature, in that they derive some economic utility in giving to the poor. For example, a rich person may experience more utility from giving \$100 to the poor than they would have gained had they spent \$100 on something for themselves. The poor person receiving the \$100 will also be better off. In addition to altruistic reasons, rich persons may support governmental redistribution of wealth: 1) as a form of insurance policy (should they ever become poor, the policy pays off and they are able to collect benefits from the government); or 2) because it improves social stability (lowers crime and rioting among poor people)[citation needed], allowing rich persons to more easily enjoy the benefits of their wealth.[9]

According to one study, "All demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo."[10] [in the USA]

Economic effects

Number of high net worth individuals in the world, 2011.[11]

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 on the one hand 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.[12] The authors argue inequality leads to the social ills through the psychosocial stress, status anxiety it creates.[13]

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."[14][15]

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.[16] Many economists view supply-side as an ill-conceived economic theory[citation needed]. Critics of supply-side economics point to the lack of academic economics credentials by movement leaders such as Jude Wanniski and Robert Bartley to imply that the theories behind it are bankrupt.[17][18] Nobel prize winning economist Paul Krugman published a book dedicated to attacking the theory, and Reaganomics, under the title "Peddling Prosperity". Mundell in his The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel acceptance lecture (awarded for unrelated work in optimum currency area) countered that the success of price stability was proof that the supply-side revolution had worked. The continuing debate over supply-side policies tends to focus on the massive federal and current account deficits, increased income inequality and its failure to promote growth.[19]

Average tax rate percentages for the highest-income U.S. taxpayers, 1945-2009

The Pigou–Dalton principle is that redistribution of wealth from a rich person to a poor person reduces inequality, so long as the order is not switched (the initially richer person is not made poorer than the initially poorer person: they are brought together and not switched). Hugh Dalton suggested further that, assuming no effects other than transfer, such transfers increase collective welfare, because the marginal utility of income or wealth to a rich person is less than that to a poor person. Maximal welfare is achieved if all have equal wealth or income. Dalton's analysis sets aside questions of economic efficiency: redistribution may increase or decrease overall output – it may grow or shrink the pie, not simply change how it is divided.

The Congressional Budget Office (CBO) has estimated that extending the Bush tax cuts of 2001-2003 beyond their 2010 expiration would increase deficits by \$1.8 trillion dollars over the following decade.[20] The CBO also completed a study in 2005 analyzing a hypothetical 10% income tax cut and concluded that under various scenarios there would be minimal offsets to the loss of revenue. In other words, deficits would increase by nearly the same amount as the tax cut in the first five years, with limited feedback revenue thereafter. Through increased budget deficits, the tax cuts primarily benefiting the wealthy will be paid for — plus interest — by taxes borne relatively evenly by all taxpayers.[21] The paper points out that these projected shortfalls in revenue would have to be made up by federal borrowing: the paper estimates that the federal government would pay an extra \$200 billion in interest over the decade covered by the paper's analysis.[22]

In the absence of negative externalities, the introduction of taxes into a market reduces economic efficiency by causing deadweight loss. In a competitive market the price of a particular economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. The introduction of a tax causes the price received by the seller to be less than the cost to the buyer by the amount of the tax. This causes fewer transactions to occur, which reduces economic welfare; the individuals or businesses involved are less well off than before the tax. The tax burden and the amount of deadweight cost is dependent on the elasticity of supply and demand for the good taxed. Most taxes—including income tax and sales tax—can have significant deadweight costs.

Prospect of Upward Mobility hypothesis

The distribution of net wealth in the United States, 2007. The chart is divided into the top 20% (blue), upper middle 20% (orange), middle 20% (red), and bottom 40% (green). (The net wealth of many people in the lowest 20% is negative because of debt.)[23]

The Prospect of Upward Mobility (POUM) hypothesis is an argument that explains why some poor and working class voters do not support efforts by governments to redistribute wealth. It states that many people with below average income do not support higher tax rates because of a belief in their prospect for upward mobility.[24] 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.[24] Second, one must assume that poorer workers are "not too risk averse".[24] 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.[24]

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.[24] 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.[24]

Criticism

Conservative, libertarian and neoliberal arguments against property redistribution consider the term a euphemism for theft or forced labor, and argue that redistribution of legitimately obtained property cannot ever be just.[25] 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.[26]

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 that vest all property in the Crown. [These ideas] are arbitrary, despotic, and, in our government, unconstitutional."[27] James Madison, author of the Constitution, wrote, "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents."[28]

United States President Grover Cleveland vetoed an expenditure of federal aid explaining,

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 ... The friendliness and charity of our fellow countrymen can always be relied on to relieve their fellow citizens in misfortune. .... 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.[29]

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. ^ Harvey S. Rosen & Ted Gayer, Public Finance p. 271-72 (2010).
4. ^ Redistribution (Stanford Encyclopedia of Philosophy)
5. ^ Marx, K. A Contribution to the Critique of Political Economy. Progress Publishers, Moscow, 1977
6. ^ a b c http://www.jstor.org/stable/117283 Unequal Societies: Income Distribution and the Social Contract. Roland Benabou. The American Economic Review, Vol. 90, No. 1 (March 2000), pp.96-129.
7. ^
8. ^ Allgoewer, Elisabeth (May 2002). "Underconsumption theories and Keynesian economics. Interpretations of the Great Depression". Discussion paper no. 2002-14.
9. ^ Harvey S. Rosen & Ted Gayer, Public Finance p. 265-66 (2010).
10. ^ Norton, M. I., & Ariely, D., "Building a Better America – One Wealth Quintile at a Time", Perspectives on Psychological Science, January 2011 6: 9-12
12. ^ Statistics and graphs from Wilkinson and Pickett research.
13. ^ http://www.guardian.co.uk/books/2010/aug/14/the-spirit-level-equality-thinktanks The Spirit Level: how 'ideas wreckers' turned book into political punchbag]| Robert Booth| The Guardian| 13 August 2010
14. ^ Inequality and Unsustainable Growth: Two Sides of the Same Coin? Andrew G. Berg and Jonathan D. Ostry| IMF STAFF DISCUSSION NOTE | April 8, 2011
15. ^ Berg, Andrew G.; Ostry, Jonathan D. (2011). "Equality and Efficiency". Finance and Development (International Monetary Fund) 48 (3). Retrieved September 10, 2012.
16. ^ Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0-465-09095-8.
17. ^ Chait, J. (2007). The Big Con: How Washington Got Hoodwinked and Hijacked by Crackpot Economics. Boston: Houghton Mifflin. ISBN 0-618-68540-5.
18. ^ Harper, David. "Understanding Supply-Side Economics".
19. ^ Gale, W. G. & Orszag, P. R. (2003-05-09). "Bush's Tax Plan Slashes Growth". The Brookings Institution. Retrieved 2007-10-23.
20. ^ Analysis of President's Budget Table 1-3 Page 6
21. ^ CBO Study Grey Box Page 1
22. ^
23. ^ Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 by Edward N. Wolff, Levy Economics Institute of Bard College, March 2010
24. [1] Social Mobility and the Demand for Redistribution: The Poum Hypothesis. Roland Benabou, Efe A. Ok. The Quarterly Journal of Economics, Vol. 116, No. 2 (May, 2001), pp. 447-487
25. ^ "Redistribution" as Euphemism or, Who Owns What? Philosophy Pathways, Number 65, 24 August 2003, by Anthony Flood
26. ^ Plotnick, Robert (1986) "An Interest Group Model of Direct Income Redistribution", The Review of Economics and Statistics, vol. 68, #4, pp. 594-602.