Why Government Should Redistribute Income?

What costs and benefits are there to redistributing income?

Why do we have income in the first place?

The second question is easy.

We have income to provide an incentive for productive (mutually beneficial) exchanges within the economy. People gain purchasing power through labor, and it provides them with incentives to work. If we redistribute income, we diminish that incentive, but only very gradually unless the marginal tax rate is very high. (This is the idea behind the Laffer curve, but Laffer had the shape wrong.)

Redistributing income, while it only has slight costs, has great benefits. The benefits come from the diminishing marginal utility of money. That is, the same amount of additional money is worth more to people who start off with less money. For example, someone who already has a BMW and Mercedes has little interest in a Ford Escort, but someone else who walks for an hour to work and home every day, the car is a valuable purchase indeed.

Since money has diminishing marginal utility, we should take money from the rich and give it to the poor, so long as it doesn’t reduce the incentive to work too much. The big question is, what is too much? This, however, is a relatively minor question compared to whether or not to redistribute income at all, and is best answered through experimentation.

One may ask, if redistribution of income is so good, why wasn’t it started until the twentieth century? In previous centuries, society was much different and people had much greater sense of community because transportation and communication were much more limited. People were willing to help their neighbors, both because they felt that they would want the same treatment and because the religions that dictated their moral values told them to. However, this began to change with the development of cities and is now largely gone. That is not to say that it is a better system than one that we could have now.

Income redistribution can be either the act of an individual’s voluntary charitable giving or government mandated compulsory transfer of assets and income from one group of citizens to another group.

Most conservatives accept and advocate voluntary charitable giving as necessary to alleviate social problems, but believe the government should not interfere, but rather should encourage personal involvement and personal giving to the underprivileged, elderly, disabled, and other hardship cases. Also, many conservatives view some forms of government redistribution as an impingement on personal rights, leading to unjust expropriation of property, fostering irresponsible social conduct and acting as a disincentive for personal involvement to alleviate social problems. Also, mandatory giving may create jobs for bureaucrats and dependent constituencies as electoral bases. By contrast better off liberals like professors are more likely to vote for political parties that favor income redistribution. Income redistribution will increase the taxation they personally pay. They show altruism by the way they vote.

Liberals generally support income redistribution based on their belief that individual charitable giving cannot be relied upon and tends to advocate some degree of compulsory redistribution of resources as necessary. Charitable institutions are sometimes bureaucratic and inefficient.

Examples of government programs performing compulsory income redistribution include welfare and progressive taxation.

Socialists believe that increased redistribution and consequent reductions in inequality lead to better outcomes for individual welfare and freedom. Likewise, Professor Richard Layard has argued that “in societies where income differences between rich and poor are smaller, the statistics show not only that community life is stronger and people are much more likely to trust each other; but also there is less violence including substantially lower homicide rates health is better and life expectancy several years longer, prison populations are smaller; birth rates among teenagers are lower, levels of educational attainment among school children tend to be higher; and there is more social mobility. In all cases, where income differences are narrower, outcomes are better.”