Redistribution of income and wealth

History

In ancient times, redistribution operated as a palace economy. These economies were centrally based around the administration, so the dictator or pharaoh had both the ability and the right to say who was taxed and who got special treatment.

Another early form of wealth redistribution occurred in Plymouth Colony under the leadership of William Bradford. Bradford records in his diary that this "common course" bred confusion, discontent, distrust, and the colonists looked upon it as a form of slavery.

Role in economic systems

Different types of economic systems feature varying degrees of interventionism aimed at redistributing income, depending on how unequal their initial distributions of income are. Free-market capitalist economies tend to feature high degrees of income redistribution. However, Japan's government engages in much less redistribution because its initial wage distribution is much more equal than Western economies. Likewise, the socialist planned economies of the former Soviet Union and Eastern bloc featured very little income redistribution because private capital and land income – the major drivers of income inequality in capitalist systems – was virtually nonexistent; and because the wage rates were set by the government in these economies.

Modern forms of redistribution

Today, income redistribution occurs in some form in most democratic countries through economic policies. Redistributive policies attempt to take wealth, income, and other resources from the “haves” and give them to the “have-nots.” For example, the U.S. government’s progressive-rate income tax policy is redistributive because much tax revenue goes to social programs such as welfare, Social Security, and Medicare.

In a progressive income tax system, a high income earner will pay a higher tax rate than a low income earner. Not only do high-income families pay more in taxes in pure dollar amounts than low-income families, but they also pay a greater amount in taxes as a percentage of their income than low-and-middle income families. 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.

Another common type of governmental redistribution of income are direct benefit programs. These programs are also funded by the United States tax payers. Direct benefit programs involve either cash transfers or the purchase of specific services for an individual. By far the largest direct benefit programs are Social Security and Medicare. Unlike subsidies and voucher programs, Social Security recipients receive a direct payment not a voucher that is limited as to what it can buy. Medicare is a government run health insurance program that covers people that are 65 or older, certain younger people with disabilities, and people with end-stage renal disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD).This is a direct benefit program because the government is directly providing health insurance for those who qualify.

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 to increase economic stability and opportunity for the less wealthy members of society and thus usually include the funding of public services.

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.

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. 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.

Moral obligation

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

Economic effects of inequality

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. The authors argue inequality leads to the social ills through the psychosocial stress, status anxiety it creates.

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."

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.

The socialist economists John Roemer and Pranab Bardhan criticize redistribution via taxation in the context of Nordic-style social democracy, highlighting its limited success at promoting relative egalitarianism and its lack of sustainability. They point out that social democracy requires a strong labor movement to sustain its heavy redistribution, and that it is unrealistic to expect such redistribution to be feasible in countries with weaker labor movements. They point out that, even in the Scandinavian countries, social democracy has been in decline since the labor movement weakened. Instead, Roemer and Bardhan argue that changing the patterns of enterprise ownership and market socialism, obviating the need for redistribution, would be more sustainable and effective at promoting egalitarianism.

Marxian economists argue that social democratic reforms – including policies to redistribute income – such as unemployment benefits and high taxes on profits and the wealthy create more contradictions in capitalism by further limiting the efficiency of the capitalist system via reducing incentives for capitalists to invest in further production. In the Marxist view, redistribution cannot resolve the fundamental issues of capitalism – only a transition to a socialist economy can.