Income Redistribution

If you were rich, what would you do with your money? A lot of people say that they'd donate at least a portion of their earnings to charity or the less fortunate. But how does that actually play out? And is there a way for everyone to be able to help those who are less fortunate without being millionaires themselves? There is a way and it's called - income redistribution. To learn more about how income redistribution works, the strategies used, examples, and more, keep reading on!

Income Redistribution Definition

Income and poverty rates differ widely among and within specific categories of people (such as age, sex, ethnicity) and nations. With this gap between the income and poverty rates, something that is often brought up is income inequality, and not long after that income redistribution. When there is income redistribution, it's exactly as it sounds: income is redistributed throughout the society so as to lessen the income inequality present.

Income redistribution aims to promote economic stability and possibilities for society's less affluent members (essentially narrowing the gap between the poor and the wealthy), and so frequently includes financing for social services. Because these services are paid by taxes, people who advocate for income redistribution claim that higher taxes for the richer members of society are necessary to best support public programs benefiting those who are underprivileged.

Income Redistribution Strategies

When discussing income redistribution strategies, two strategies are often the ones brought up the most: direct and indirect.

Direct income redistribution strategies

As far as the near future is concerned, taxes and income redistribution to the disadvantaged people within a society are some of the most straightforward ways to lessen the amount of inequality and poverty that exist. While these are useful or considered as useful when economic growth benefits aren’t experienced by the poor, a majority of the time they’re not enough to make a significant impact. That’s why cash transfer projects have been used more often and have proven successful.

The catch with these projects is that they are conditional. They will provide funds for households in exchange for those households completing specific conditions such as ensuring their children have up-to-date vaccinations. One of the issues with these approaches is that their size is too small. What’s meant by this is that the amount that is currently available to be re-distributed to the people who need it is not enough to cover all of the households that need it. In order to make these programs even bigger, more resources are needed.

One of the ways that this could be solved is by increasing income taxes for those who are more upper class. Also, another way to make sure that there are enough funds is to better monitor higher income people to ensure that they’re not trying to get away with tax evasion.

Indirect income redistribution strategies

If implemented correctly, income redistribution strategies will reduce poverty by reducing inequality. However, it may not significantly boost growth, besides potentially lowering social tensions caused by inequality. Direct investment in opportunities for the poor is critical. Transfers to the lower-class shouldn't only consist of money; they should also increase people's ability to earn income, immediately and later in life. Access to health care, water, energy, and transportation, as well as education, are all important When hardship strikes, social aid is vital in preventing individuals from sliding into poverty traps.

Strategies that promote more equality and greater growth focus on gradually increasing resources and allocating them to services that support the poorest sections of the community in this or the future generation. Other approaches which do not depend on redistribution might accomplish similar results. However, prior to actually considering redistribution, governments should explore improving the pro-poor aspect or inclusivity of their economic growth strategy, particularly through increasing employment for unskilled individuals.

Having laws that dictate and set the minimum wage, while controversial due to the possible negative effects if the minimum wage gets to be too high, result in more fairness regarding the distribution of wages. Such initiatives may genuinely enhance labor productivity in underdeveloped economies.

Anti-discrimination legislation and lowering rent seeking are also some great ways to indirectly assist. Anti-discrimination legislation may help facilitate equality and development by enhancing employment and training opportunities for minority groups. And by lowering rent seeking, anti-corruption policies are likely to be the greatest options for boosting growth and increasing income equality, even though the imbalance caused by corruption is typically hard to detect.

Income Redistribution Examples

Let's go over two of the best known income redistribution examples within the U.S.

Food Stamps

Food stamps are funds given for food purchases to those whose earnings fall below the poverty threshold. They are funded by the government and managed by the states. Those who are eligible for food stamps get a card that they use that is refilled every month with a certain amount of money to assist that individual or family in acquiring food and non-alcoholic drinks in order to ensure that they have access to food and enough for a healthy diet.

Table 1. Percentage of school-age U.S. children participating in food stamp programs - StudySmarter.

Source: Center on Budget and Policy Priorities¹

The table above shows what percentage of school-age U.S. children participate in food stamp programs every month, and that would otherwise most likely be hungry if not for the food stamps programs. As you can see, almost 1/3 of U.S. children under the age of 5 rely on programs like these in order to survive. This is a great assistance to parents as it helps them afford food for themselves and their children, and ensures that the kids have sustenance.

Medicare

Medicare is a U.S. government program that pays for healthcare services for persons 65 and older, those under 65 who meet certain conditions, and those with certain illnesses. There are four parts to it - A, B, C, D - and individuals can choose which parts they want. Many go with A as it is premium-free and there are no payments needed. Medicare itself is an insurance and therefore is used for medical purposes. People who are eligible for Medicare receive red, white, and blue cards in the mail that they are to hold onto.

Medicare Card. Source: Wikimedia

Users don't have to pay for this like you would for regular insurance. Instead, costs for medical needs are covered by a trust that people who are covered have already put money into. In this way, it can be considered as income redistribution.

Income Redistribution Policy

One of the common political arguments against income redistribution policy is that redistribution is a trade-off between fairness and effectiveness. A government with substantial anti-poverty initiatives needs more money and, as a result, higher tax rates than one whose primary mission is to provide common services like defense spending.

But why is this trade-off bad? Well, it tends to imply that there should be a way to keep the costs of these programs down. One of the ways to do this is to only give the benefits to those who actually need them. This is done by something called a means testing. However, this causes an issue of its own.

Income Redistribution Effects

Income redistribution effects result from the United States welfare state that has the function of redistributing money from a group of people to another group of people. The Census Bureau evaluates the impact of this redistribution in a report titled "The Effects of Government Taxes and Transfers on Income and Poverty" every year. One of the main things to remember about this study is that it checks out the immediate impacts of taxes and transfers, but doesn't take into account any behavioral changes the taxes and transfers may create. For example, the research makes no attempt to predict how many elderly U.S. citizens who are already retired would still be working if they weren't receiving retirement funds.

Income Redistribution Pros and Cons

Let's go over some of the pros and cons of income redistribution.

Pros of Income Redistribution:

• It helps to even out a society's wealth or income distribution.

• It has a broader impact on the economy as a whole, rather than just a few individuals.

• Even those who don't work or can't work are guaranteed to have a way to support themselves enough to survive.

• It can assist in bridging the wealth gap in nations with high inequality, when political and social conflicts or the emergence of populist regimes may be detrimental to long-term economic growth.

Cons of Income Redistribution:

• Even if the underprivileged gain more access to funds, these individuals continue to lack the necessary skills, ambition, and relationships to compete successfully in the economy.

• State and municipal taxes tend to be regressive, meaning that individuals with lower incomes end up giving a larger percentage of their income than those with higher incomes.

• Since the poor have to pay higher tax if they work, they lose out on a large part of their redistribution money or funds. This in turn "penalizes" them from working and actually makes them more dependent on the funds given.