German progressive tax
rates for different incomes. Progressive tax systems require the rich
to pay taxes at higher rates, to make it possible to raise larger total
sums to pay for governmental functions. Some argue such systems are primarily for wealth redistribution.
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, charity, welfare, public services, land reform, monetary policies, confiscation, divorce or tort law. The term typically refers to redistribution on an economy-wide basis rather than between selected individuals.
Interpretations of the phrase vary, depending on personal
perspectives, political ideologies and the selective use of statistics.
It is frequently heard in politics, usually referring to perceived
redistributions from those who have more to those who have less.
Occasionally, however, it is used to describe laws or policies that
cause opposite redistributions that shift monetary burdens from wealthy
to low-income individuals.
The phrase can be emotionally charged and used to exaggerate or
misconstrue the motivations of opponents during political debates. For
example, if an individual politician calls for increased taxes on higher
income individuals, their sole focus may be to raise funds for specific
government programs, tapping the largest available sources while
realizing that low-wage workers have little or no excess income to draw
tax revenues from. Political opponents might argue that this
politician's prime motivation is to redistribute wealth, when
redistribution is not their goal.
The phrase is often coupled with the term "class warfare," with high income earners and the wealthy portrayed as victims of unfairness and discrimination.
Redistribution tax policy should not be confused with predistribution
policies. "Predistribution" is the idea that the state should try to
prevent inequalities occurring in the first place rather than through
the tax and benefits system once they have occurred. For example, a
government predistribution policy might require employers to pay all
employees a living wage, not just a minimum wage, as a "bottom-up" response to widespread income inequalities or high poverty rates.
Many alternate taxation proposals have been floated without the
political will to alter the status quo. One example is the proposed "Buffett Rule",
which is a hybrid taxation model composed of opposing systems, intended
to minimize the favoritism of the special interest tax design.
The effects of a redistribution system are actively debated on
ethical and economic grounds. The subject includes analysis of its
rationales, objectives, means, and policy effectiveness.
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.
A closely related term, distributism
(also known as distributionism or distributivism), is an economic
ideology that developed in Europe in the late 19th and early 20th
century based upon the principles of Catholic social teaching, especially the teachings of Pope Leo XIII in his encyclical Rerum novarum and Pope Pius XI in Quadragesimo anno. More recently, Pope Francis in his Evangelii Gaudium, echoed the earlier Papal statements.
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
It
is inevitable, the redistribution of wealth and its practical
application, taxation, are bound to change with the continuous evolution
of social norms, politics, and culture. Within developed countries
income inequality has become a widely popular issue that has dominated
the debate stage for the past few years. The importance of a nation’s
ability to redistribute wealth in order to implement social welfare
programs, maintain public goods, and drive economic development has
brought various conversations to the political arena. A country’s means
of redistributing wealth comes from the implementation of a carefully
thought out well described system of taxation. The implementation of
such a system would aid in achieving the desired social and economic
objective of diminishing social inequality and maximizing social
welfare. There are various ways to impose a tax system that will help
create a more efficient allocation of resources, in particular, many
democratic, even socialist governments utilize a progressive system of
taxation to achieve a certain level of income redistribution. In
addition to the creation and implementation of these tax systems,
“globalization of the world economy [has] provided incentives for
reforming the tax systems” across the globe.
Along with utilizing a system of taxation to achieve the redistribution
of wealth, the same socio-economic benefit could be achieved if there
are appropriate policies enacted within current political infrastructure
that addresses these issues. Modern thinking towards the topic of the
redistribution of wealth, focuses on the concept that economic
development increases the standard of living across an entire society.
Today, income redistribution occurs in some form in most democratic
countries through economic policies. Some redistributive policies
attempt to take wealth, income, and other resources from the “haves” and
give them to the “have-nots,” but many redistributions go elsewhere.
In his article Redistribution, Dwight R. Lee states:
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“…most government transfers are not from the rich to the poor.
Instead, government takes from the relatively unorganized (e.g.,
consumers and general taxpayers) and gives to the relatively organized
(groups politically organized around common interests, such as the
elderly, sugar farmers, and steel producers). The most important factor
in determining the pattern of redistribution appears to be political
influence, not poverty. “
“The direct transfer of cash and services is only one way that
government transfers income. Another way is by restricting competition
among producers. The inevitable consequence—indeed, the intended
consequence—of these restrictions is to enrich organized groups of
producers at the expense of consumers. Here, the transfers are more
perverse than with Medicare and Social Security. They help relatively
wealthy producers at the expense of relatively poor (and, in some cases,
absolutely poor) consumers. Many government restrictions on
agricultural production, for example, allow farmers to capture billions
of consumer dollars through higher food prices (see agricultural subsidy
programs). Most of these dollars go to relatively few large farms,
whose owners are far wealthier than the average taxpayer and consumer
(or the average farmer). Also, wealthy farmers receive most of the
government’s direct agricultural subsidies."
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Some consider the U.S. government’s progressive-rate income tax policy as redistributive, because some of the tax revenue goes to social programs such as welfare and Medicare.
In a progressive income tax
system, a high income earner will pay a higher tax rate (a larger
percentage of their income) than a low income earner; and therefore,
will pay more total dollars per person.
Other taxation-based methods of redistributing income are the negative income tax for very low income earners and tax loopholes (tax avoidance) for the better-off.
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 or influential special interest groups and corporations.
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.
It has been argued that the U.S. Social Security
program redistributes income from the rich to the poor, but the
majority of those receiving Social Security earned their benefits
through tax withholding from their paychecks or quarterly income
statements, and most benefits are indexed to the actual earning levels
of individual workers. Only the highest- and lowest-income workers fall
outside normal rates. In addition, Social Security deductions are only
taken from the first $200,000 in income, with nothing further taken
from higher incomes over that amount. In other words, a person who earns
$100 million a year pays the same Social Security tax as another worker
who earns $200,000 a year.
Contrary to popular belief, a recent study
found that, overall, the Social Security System was slightly regressive
against the poor and not redistributive, once important factors were
taken into account (for example, the longer life expectancy of the
wealthy when compared to the poor gives them more years to collect
benefits).
Governmental redistribution of income may include a direct
benefit program involving either cash transfers or the purchase of
specific services for an individual. Medicare is one example.
Medicare is a government-run health insurance program that covers
people age 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
Number of high-net-worth individuals in the world in 2011
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,
reportedly 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 communist economy can.
