Balancing the Scales: Economic Redistribution
Income redistribution, achieved through taxation and targeted transfers, helps curb inequality by providing financial support to the poorest. Governments use this approach to maintain low Gini coefficients and reduce income inequality, often measured by comparing income distribution before and after taxes and transfers, which can take the form of social assistance, universal benefits, and insurance. (OECD)
Market income is the total income generated in an economy, encompassing wages, salaries, profits, and rent. Disposable income is what households have left after taxes and deductions.
In 2018, the OECD’s working-age population had an income inequality Gini coefficient of 0.41 before taxes and transfers, dropping to 0.31 post-government interventions. This scale, from 0 (perfect equality) to 1 (perfect inequality), highlights significant inequality reduction through taxation and social transfers. Countries like Ireland (39%), Belgium (38%), and Finland (36%) demonstrated the highest income redistribution, while Chile showed the least (5%) after government interventions. (OECD ILibrary)
While the example highlights a decrease in income inequality after taxes and transfers, some economists remain sceptical about income redistribution, citing potential negative impacts on economic growth. Concerns include disincentives, reduced economic efficiency, excessive welfare dependency, and increased administrative costs associated with high levels of income redistribution.
Existing redistribution policies in the USA
The US faces high-income inequality among OECD nations, contributing to reduced social mobility. Bridging wealth and poverty gaps is a focal point in domestic and international policy discussions. Although the average American is globally wealthier, the 10% in poverty saw a 15% real income decline from 2000 to 2010, with a slight recovery in 2011–2012. Meanwhile, the top 1% receives 20% of the nation’s pre-tax income, a pattern observed in the US and other OECD nations. (OECD).
The United States is the fourth-highest among OECD countries in disposable income inequality, measured by the Gini coefficient. This ranking remains consistent when considering alternative measures like the income gap between the wealthiest and poorest 10%, where the average income of the top 10% in the U.S. is 16 times greater than that of the bottom 10%, surpassing the OECD average of 9.6. (OECD,2014)
The United States employs multiple redistribution policies, including social security, medicare, medicaid, Earned Income Tax Credit (EITC), Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and the Affordable Care Act (ACA). Additionally, a progressive taxation system imposes higher tax rates on higher-income individuals, enhancing the overall income redistribution effort.
These policies focus particularly on a few groups of individuals. For example, the supplemental nutrition assistance program (SNAP) provides aid to low income families by assisting them financially to buy food. In similar fashion, all these policies and governmental acts help the eligible, underprivileged individuals to access resources and necessities.
Adoption of redistribution policies in the USA
One proposal suggests replacing existing anti-poverty programs in the United States with a “negative income tax,” a concept advocated by economist Milton Friedman. This negative income tax would guarantee a minimum income and apply a flat tax rate to a person’s earnings, with the government providing a transfer if the earned income falls short of the guaranteed minimum.
Currently, the United States does not employ the policy of negative income tax, although they do have the earned income tax credit which functions similarly and benefits the Americans (MIT SLOAN, 2018). This EITC is primarily there to assist low-to-moderate income families; it is a refundable tax credit used to supplement the wages of low-income workers and help offset the effect of Social Security taxes (IRS).
The proposed negative income tax offers advantages such as reduced administrative costs, increased transparency, and simplified rules for welfare recipients. Critics worry about decreased work and saving incentives, but proponents argue it may cause fewer economic distortions than current anti-poverty programs. The proposal underscores transparency in anti-poverty policies and aims to address concerns about fraud and inefficiency in existing programs. (National Affairs)
Other minor, efficient policies, which take into account the current demographics and other details in the US are:
- Wealth Tax: Countries like Norway and France have wealth taxes, which target the net worth of individuals above a certain threshold. This could help address long-term wealth accumulation and reduce inequality over generations. (ITEP)
- Gradual increase of minimum wage
- Greater percentage of tax for incomes above a certain margin
In countries like India, a significant method of large-scale redistribution is through ration cards, specifically the Public Distribution System (PDS). The Department of Food ensures citizens’ access to essential goods via discounted or free goods and services, rather than direct monetary aid. Additionally, states like Telangana implement redistribution policies, providing financial aid to farmers for their annual crop start. (NFSA, 2013)
Australia maintains a substantial tax system, with the government collecting $352 billion in tax revenue in 2013–14, equivalent to 23% of the GDP. The majority of this revenue, around 80%, is derived from three main taxes: personal income tax, company income tax, and the Goods and Services Tax (GST). Personal income tax alone contributes nearly half of the total Australian Government tax revenue. Additionally, it’s noted that the GST, while a significant contributor, has a slightly regressive impact, considering the income disparity among various groups.(pc.gov.au)
Implications of wealth and super millionaire tax on redistribution
Wealth and super/ultra millionaire taxes primarily target high-income earners with substantial assets. Wealth tax typically applies to an individual’s net worth, calculated as assets minus liabilities. Ad Valorem taxes, often considered wealth taxes, indirectly address wealth by focusing on specific transactions or assets, such as real estate or wealth transfers (Investopedia).
Proposed super millionaire and wealth taxes target households with a net worth of $50 million or more, representing the wealthiest 75,000 households (top 0.1%). The plan includes a 2% annual tax on net worth above $50 million and a 6% tax on net worth exceeding $1 billion. This targeted tax on roughly 75,000 households is estimated to generate $3.75 trillion in revenue over a decade to address income inequality. (Elizabeth Warren)
Super millionaire taxes enhance government cash flow, fostering greater income redistribution to the poor, stabilising the economy, and promoting increased income equality. This is achieved by taxing income from all sources, including net worth and assets of the higher class. Additionally, the majority of developed countries’ populations support the idea of raising taxes for the wealthy.
Implementation challenges: Implementing a wealth tax can be challenging due to the valuation of assets, potential avoidance strategies, and administrative complexities. Critics argue that wealth taxes may discourage investment and capital formation. In addition to this, wealthy individuals may employ strategies to minimise their tax liabilities, such as transferring assets to family members or utilising offshore tax havens. This can lead to tax evasion and avoidance. Lastly, when considering behavioural economics, we need to look at public perception and how fair taxing one group of individuals is.
Regardless, governments are considering applying wealth taxes, increasing the amount of tax collected as well as help in supporting and providing common pool resources and public goods. (The Economist)
Consequences of UBI in the US
Implementing universal basic income (UBI) as a solution to income inequality faces challenges in large populations, such as the United States with 340 million people. For example, providing a $1000 monthly stipend to each individual would cost the government $4 trillion annually. Even limiting it to adults would still result in a substantial expense of $3.1 trillion. (UBI Center)
John Kay, an Oxford economist, discovered that achieving an acceptable Universal Basic Income (UBI) level is “impossibly expensive” in countries like Finland, France, Germany, Switzerland, the UK, and the US. The dilemma, he notes, lies in choosing between setting a too-low basic income or facing unmanageable costs.
Contrarily, universal basic income has the potential to significantly reduce poverty rates and income inequality, providing a much-needed boost to slow progress. Moreover, it operates efficiently, replacing programs like SNAP and alleviating the burden on recipients. (UBI Center)
While understanding this topic more, the three different types of economics look at redistribution from perspectives. Modern economics looks at the balance between government intervention and markets, efficiency, and addressing inequality. Whereas the Keynesian model Supports government intervention to manage economic cycles, advocates for policies like progressive taxation and social spending, and sees redistribution as a tool to stabilise the economy. Lastly, the classical model stresses the importance of free markets, believes that wealth naturally distributes based on individual merit, and opposes significant government-led redistribution efforts.
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