Arguments for and Against Government Income Redistribution Programs

Abstract

This paper explores many cases, for and against government income redistribution programs with various theoretical justifications often found in the economics literature. Is that because every reason is weak? This paper review the major arguments advanced in the study. The articles review arguments supporting income redistribution with significant differences: Paretian rationales affirming that every player, gain from redistribution; justice theories and utilitarianism. The major arguments against income redistribution highlights the market order normative virtues, and the negative impacts of government income redistribution. Other articles address the expenditure programs for the poor and the importance of Cost-benefit analysis. This paper also examines why welfare programs and the tax system discourages work effort? The literature concludes that redistribution should focus largely on Paretian arguments, while assisting the poor have a higher degree of maximizing everyone happiness than general smoothing the income gaps.

Keywords: expenditure programs, poor, redistribution, tax system, welfare programs

Table of Contents

Types of Income Redistribution

Proponents and Opponents of Income Redistribution

Proponents of Income Redistribution

Financial losses.

Insurance.

Capital and Economic Efficiency.

Other Supporting Arguments.

Opponents of Income Redistribution.

The Wealth Gap is Necessary.

Justice of Market Outcome.

Inequities of Government Redistribution.

Other Opposing Arguments

Redistribution and Liberty.

Equality of Opportunity Versus Equality Results.

Inefficiencies of Government Redistribution.

Political Consequences of Redistribution

Redistribution Harms the Recipients.

The Expenditure Programs for the Poor.

Temporary Assistance for Needy Families (TANF).

Entitlement, Time Limits, and Work Requirement.

Block Grants to States and Benefits Reduction Rates

The Earned Income Credit (EITC).

Medicaid.

Supplemental Nutrition Assistance Program (SNAP).

The Importance of Cost-Benefit Analysis for Proposed Major Government Policies.

Welfare Programs and the Tax system Discourages Work Effort.

Welfare Incentives.

Tax System and Transfer Programs.

Conclusion and Future Studies

References

Income Redistribution

Income Redistribution is an economic exercise that aims at balancing wealth or income distribution in society by transferring income directly or indirectly from the rich to the poor. Redistribution of income is commonly accepted as a modern government legitimate practice and reflects somehow a realistic acceptance. To enforce this phenomenon, the government and economists embrace economic measures and approaches, such as progressive taxation. Given the social vices, the extreme poverty costs or the adverse impacts and a widen income gap, economists worldwide attempt to bridge the gap or preserve a favorable distinction. Therefore, modern rulers redistribute a great deal of revenue. Income redistribution has many approaches; some require governments, while others affect people and organizations.

Additionally, an increasing economic, social, and political debate exist for and against income redistribution trade-off, efficacy and equity. The compromise solution practically translated into social policy execution and outcomes obtained in macroeconomics policies to define the income redistribution processes, optimum range, and nature. The empirical research submitted responds to this issue through relevant research questions solutions on the argument for both sides of income redistribution, the expenditure programs for the poor, the importance of calculating cost-benefit analysis for proposed major government policies and the data that suggests that the cumulative effect of different welfare programs and the tax system discourages work effort.

Types of Income Redistribution

The article discuss several income redistribution programs, aid to the poor, and any government redistributive policy that prejudices some people to benefit others. Five types of income redistribution include progressive income tax, subsidy, social security programs, Medicare, and Wealth tax. With progressive income tax, persons earning more, or wealthy individuals pay higher taxes than a middle or lower class which pay lower or no tax. Secondly, subsidy grants incentives to the middle class or poor workers. Thirdly, Social security programs which offer benefits to individuals living under the poverty threshold. Fourthly, Medicare which provides reduced rate or free medical services to lower-income or poor households. Lastly, the wealth tax which taxes the wealthy households. The government employed tax revenues to provide benefit to lower-income households or deprived families, thereby enhancing society income equality. In other words, government attempts redistribution to achieve economic equilibrium.

Proponents and Opponents of Income Redistribution

Indeed, many redistributive programs aimed at different goals such as decreasing overall society inequality, protection against unforeseen difficulties, or helping susceptible groups like the sick and senior citizens. Several arguments exist for and against income redistribution. Previous studies discovered that government wealth redistribution could deliver long-term financial benefits like better medical, less crime, and a more robust government. Therefore, this section debates how redistribution can increase economic efficacy and how the wealth gap is a necessary fact in any capitalist society.

Proponents of Income Redistribution

Since individuals often experience uncertain incomes, the threat of loss can hinder economic investments; therefore, government could prevent negative externalities through income redistribution (contractual justice), act as insurance and improve economic efficiency.

Financial losses. Government redistribution can protect people against financial losses, but its impact on citizens investment choices is contingent on the way they respond to redistribution laws. For instance, a pharmaceutical firm might refuse to invest in a new therapy as it has a high possibility of failing. In such case, the riskier decision can benefit both the individual and society, but the failing risk impedes investments and exacerbates all. With the Utilitarianism view, government could redistribute to ensure full equality.

Insurance. Government redistribution can act as insurance to shield risks by shifting wealth from individuals with great financial prosperity to hard-pressed citizens. For example, when government taxes individuals and then offers unemployment benefits, this program disperses the unemployment risk across all by shifting wealth from the employed to the unemployed. Besides, unemployment benefits could inspire people to adopt lucrative but risker careers, including higher education investment or advanced education.

Many studies found how income redistribution could offer insurance, that supports the government’s financial output, efficacy, and development. For instance, redistribution can encourage effectiveness by eliminating credit restrictions or through performing insurance task with risk-averse people and unfinished insurance markets. Effective redistribution best suits cross-national information demonstrating that more equitable nations are also more supportive of government redistribution. Related studies reveal that people most susceptible to fluctuating income have a higher requirement for government redistribution. People investing in specialized training, for example, frequently have fewer transferrable skills and are more vulnerable to unemployment. Most skilled personnel display support, for the government’s health care, unemployment benefits, and pensions expenditures.

Capital and Economic Efficiency. Recent studies found that income redistribution can improve capital and economic efficiency through two experiments, a risk-pooling game, and free-riding. In Experiment 1, the motivated respondents who share earnings tend to make lucrative but riskier investments than participants who did not share. The improvement transpired through a full redistribution policy where everybody earned the median, a 100% tax-equivalent on earnings above average. Even in the advanced case, redistribution did not reduce investment as the demotivating theory forecasts but instead demonstrated the reverse trend. Experiment 2 discovered that the institution’s conditions are essential when respondents share their investment earnings, but not to keep it, they are susceptible to free-riding and decreased investment. More so, roughly 81% of respondents opted to invest in redistributive organizations instead of keeping their donation and remaining independent after resolving the free-rider issue (DeScioli, Shaw, Delton, 2018). Lastly, redistribution could achieve pareto efficiency.

The current experiments also indicate that redistribution can yield instant economic efficacy increases when citizens encounter risk. In such circumstances, redistribution may offer financial benefits by exploiting the large-scale risk reduction laws. The research found that instead of missing opportunities resulting from the statistical error, diminishing prospective rewards, or ideological resistance to redistribution, and citizens can identify and capitalize on risk-pooling. However, the institution must discourage free-riding, to harvest benefits, and continue without privatizing payoffs as it threatens risk pooling. The observation proposes, based on payoff framework and organization, redistribution could potentially boost efficiency.

The Risk Pooling Hypothesis. Redistribution can increase economic efficiency through a risk pooling strategy with other people. Under risk pooling, many individuals gamble independently and then split the rewards between themselves. Consequently, profits and losses tend to distribute evenly. Therefore, government redistribution could execute a comparable insurance role, except via an obligatory tax instead of a voluntary contract. For example, the U.S. Affordable Care Act which enforced numerous risk-sharing clauses, requiring health insurers spending lower-than-anticipated on health benefits to pay part of their earnings to the government to compensate insurers who invested more than anticipated. Briefly, the risk pooling hypothesis states that citizens can identify the risk pooling prospects generated by redistributive laws. Therefore, predicts that citizens will more likely capitalize on risky investment with redistributive rules presence. Nonetheless, redistribution could attain distributive justice.

Other Supporting Arguments. Moreover, the following include other positive impacts of income redistribution. First, income redistribution helps to achieve income level equilibrium ceteris paribus across the nation. Second, the redistribution diminishes poverty with government’s assistance as the impoverished attempts to meet all their fundamental needs. Lastly, the income equality objectives enable the economy to attain other significant macroeconomic, social goals, including improving wellness, education, and more.

Opponents of Income Redistribution

Every capitalist society intrinsic wealth gap is the direct result of citizens hard labor and creativity by people whose work is responsible for most employment and goods that people anticipate. Any further wealth redistribution across society will offer fewer incentives for these people to innovate, invent, and produce. This section underscores the market order standard virtues and government income redistribution negative impacts.

The Wealth Gap is Necessary. The American economic model has always centered on capitalism, a regime that promotes and financially rewards the private industry achievements. Research shows that encouraging entrepreneurship and innovation benefits the whole economy and assist Americans. Through tax payments, philanthropic gifts, and hiring millions of people in businesses, wealthy Americans are already contributing significantly to society. To further redistribute their riches would dissuade the prosperous businessmen and potential leaders from continuous innovation. With the U.S. always a capitalist economy, commodities manufacturers fight for consumer enterprises in the open market.

The concept that firms and people thrive and prosper while others fail to do so, is intrinsic in the system. This economic structure is a component of the U.S. fabric because it enables customers to choose when they access the market, to award creativity and hard labor with financial achievement. Mainly, successful persons and enterprises provide millions of American jobs and health benefits, which some assert, the government cannot generate. Indeed, an economic study showed that entrepreneurship/ innovation has a positive relationship with overall economic growth.

In 2009, the heritage foundation reported that America’s richest 10% paid roughly 70% in income taxes compared to the lower 50 % that paid 2% on their tax return. Opponents of the wealth gap amendment contend that President’s Obama’s Buffet rule for example, which imposed a 30% tax rate on persons annual earning over $1 million could further boost the wealthy tax liability and ultimately, adversely affect job creation and ventures (Walter,2016).

Moreover, opposition to the wealth gap restructuring asserted that merely snatching funds from individuals of one side of the economic spectrum and giving it to the other side is no definite resolution to the issue. They argue that governments ability to transfer these resources is not historically clear and contend that an emphasis on education and technology training better helps the weaker society members rather than cash transfers from the wealthy, who wage taxes and often dedicated donors. Put differently, the wealth gap closure opponents claim that while the idea of poverty reduction is discrete and distinct through wealth redistribution, that arguably could boost the more impoverished class society economic productivity without simultaneously reducing the copious financial resources. Wealth redistribution to the remainder of the society is less effective, mainly by providing money transfers drawn from the rich.

Justice of Market Outcome. This view emphasizes the market order normative qualities. Relying on competitive markets to change or define income distribution policies is the alternate to government performing such functions. A good economic outcome is where the competitive markets input prices equal the product input marginal-value. That is, every input receive an amount equivalent to the consumers input value to the output contribution. Thus, each individual gets an income equivalent to what they contributes to the overall income through labor and other contribution. Since it is impartial via market transactions for individuals to get an income equal to their contribution towards others well-being, the market income distribution is just, and any redistribution by government will deem unjust.

Regarding equally situated persons; people with similar opportunities and skills, having incomes connected to output contribution represent at least portion of justice’s definition. The marketplace reward hard labor, perseverance, sincerity, and thrift, which corresponds with most justice notions. In other words, if some people toil hard, while others refuse to work, equal earnings would deem unjust. Even the finest government policies would likely base on yearly earnings, producing life-long outlooks injustices. Besides, income-based strategies support people who choose to work but save little, thus violating the fundamental concept of horizontal equity. According to Milton Friedman’s ethics payments based on marginal productivity (1962), “For two individuals in comparable circumstances and with equal opportunities, the proposition that the market distribution is just is entirely reasonable”(p.197). These two circumstances hold a significant percentage of the overall population.

Inequities of Government Redistribution. Usually, economists shape equity policy judgments according to two principles: vertical and horizontal equity. Horizontal equity states that government should treat people equally situated similarly. For instance, two people with similar income should have identical tax burden and receive equal transfer. Vertical equity argument regarding taxation and transfer policies, support treating unequally situated people differently (Browning, 2002). In theory, vertical equity promote strategies that redistributes income to the poor from the rich. Greater equality implies more equity. These principles agreements, indeed, clouds various fundamental discrepancies over what defines “equally situated” and how precisely the unequal treatment is appropriate. However, government redistributive strategies frequently violate these two principles.

Few examples include Social Security and Medicare which work mainly on a pay-as-you-go, which provide significant benefits to the system’s early retirees. Since social security benefits relate to previous earnings, those with higher than average income experienced total gain. Undoubtedly, these policies clearly present vertical equity violations and award several billions in net gain to high-income ( a life-long view) homes for decades. Likewise, the well-off inclines to benefit from government higher education support. University graduates expect top-level lifetime incomes, income distribution, therefore, policies like state-backed colleges and Pell subsidies redistribute income to people considered better off.

Horizontal equity violations are also prevalent. The taxation system penalizes savers (compared to the equally situated who are not) and punish those whose choices contribute to smoking and alcohol consumption (repeat, in relation to people who are not) (Browning, 2002). For people who decide to have more offspring’s, transfer programs offer greater benefits. Those who elect working more, pay increased taxes and or gain lesser welfare benefits unlike those who decide to limit work with equal opportunities. Enabling government to redistribute income produce bad and good policies adoption, but the poor policies is essentially a component of the cost of achieving the good policies.

Other Opposing Arguments

Below, the article briefly discuss the following arguments: Redistribution and Liberty, Equality of Opportunity Versus Equality Results, Inefficiencies of Government Redistribution, Political Consequences of Redistribution and Redistribution Harms the Recipients.

Redistribution and Liberty. According to this perspective on income redistribution, taxpayers lost liberty and the resources recipients do not achieve freedom. The fundamental moral argument is that a person have liberty to do whatever they wish with their resources, if they do not hinder others with similar rights.

Equality of Opportunity Versus Equality Results. Under this view, there is certainly inequality in results as some will more efficiently exploit the opportunities than others. Whereas for equity of results, no equality of opportunity exists, as those who exploit their opportunities, benefits from their efforts are denied.

Inefficiencies of Government Redistribution.Perhaps, the most prevalent argument against government redistribution is that it decreases resources allocation efficiency, term the marginal cost of redistribution (MCR). Since there is a significant redistribution efficiency costs, it establish an important debate opposing government redistribution.

Political Consequences of Redistribution. This argument claims that government involvement in every form of redistribution induce various unwanted political implications. Probably, a major significant reasoning for opposing government redistribution are the political consequences.

Redistribution Harms the Recipients. This argument suggest that it is possible to harm redistribution recipients even if a thorough empirical economic assessment infers that their circumstances improved. Economist believe that enough evidence exists to suggests that redistributive programs could substantially enrich and simultaneously harm recipients.

Additional arguments against income redistribution include the following. Foremost, if the wealthy or higher income earner tax rise, their tax revenue plunges. The Laffer reversed ‘U’ curve explains this concept. Secondly, income redistribution generates inefficiency since the lower-income level earners elect to limit work and depend on the government to provide subsidies and income transfers. Thirdly, the progressive tax system fails to reward hard workers who earn more. Lastly, individuals with higher earnings pay more taxes.

The Expenditure Programs for the Poor

Among American’s, a strong consensus exist that the government must assist the poor, and a massive debate on the aid directions. Within the United States, welfare is a patchwork of many programs that primarily offer benefits to low-income people. These programs are means-tested; therefore, only people with financial resources under a specific threshold obtain benefits. Below, this paper addressed the main spending programs designed to support the poor.

Temporary Assistance for Needy Families (TANF). TANF is a means-tested welfare program, which only provides cash payment and other forms of aids on a temporary and provisional basis to impoverish recipients. The essential elements of TANF are No entitlement, Time Limits, Work requirement, Block grants to states, and Benefits reduction rates.

Entitlement, Time Limits, and Work Requirement. Under TANF entitlement, anybody whose income falls below a specific threshold and satisfies certain other criteria, benefits are solely on a temporary and provisional basis. Every month, roughly $4 million households receive TANF benefits. Secondly, time limits, which generally do not permit people to obtain cash benefits beyond five years, although states may waiver caseloads up to 20 %. If states choose, they may establish a shorter period. Third, work requirements, states confront financial penalties if they do not employ or prepare at minimum 50% of a single mother and 90% of two-parent families recipients (Gayer & Rosen, 2014, p.271-272).

Block Grants to States and Benefits Reduction Rates. Under TANF states block grants, each state acquires a federal grant that is size predetermine to finance welfare expenditures. The state utilizes the fund complemented by its resources to provide welfare accordingly in broad terms. States have almost complete control over their welfare framework, including which households to aid. States may utilize their subsidies, compensate cash benefits, or work-training, or adolescent pregnancy elimination programs and marriage promotions and more. However, states cannot loosen the payment limitations and labor prerequisite. Lastly, benefits reduction rates, considering the authority to regulate their welfare programs framework, states can determine by how much to cut benefits when welfare beneficiaries realize income. Some states have a policy reduction of roughly one -to -one for every dollar of earnings, benefits decreased by $1. Other states like Nebraska have massive benefits reduction tariffs.

The Earned Income Credit (EITC). This program is an aid to low-income household earnings. EITC is the most significant cash transfer administered under the tax system to make cash transfers to low-income families. EITC is available only for the working poor, which is entirely in line with TANF’s focus connecting welfare with work. The subsidy is a tax credit, which is merely a tax liability reduction. For instance, if John owes IRS $1000 in income taxes, but also have a $700 tax credit, John must settle only $300. Specifically, the government reimburses John the difference, if the EITC surpasses his tax liability. Indeed, the tax credit is equivalent to money. The EITC now costs more than $59 billion yearly (Gayer & Rosen, 2014, p. 280-281). The extent of the subsidy, however, is contingent on how many children.

Medicaid. This program is the most significant low-income expenditure program for people. If the household earned enough cash to exit welfare, their welfare benefits stop instantly. The benefits of potential loss could result in implicit marginal tax tariffs over 100%, which is a significant deterrent to exit welfare. However, under TANF, households earning enough to abandon Medicaid remain qualified for one year. The 1980s and 1990s Medicaid expansion covered low-income children and pregnant females with no other welfare system connection. For instance, a person below age six is entitled to Medicaid until their family earns 33% over the poverty threshold (Gayer & Rosen, 2014, p.283-284). Nonetheless, Medicaid possible loss can drive disincentives for working.

Supplemental Nutrition Assistance Program (SNAP). This program offers a government-issued voucher for food purchases only. Imported food, alcohol, tobacco, and animal food are forbidden. Almost $42 million people got SNAP benefits per month in 2011, and overall benefits amounted to around $78 billion. The federal government pays the snap benefit direct cost.

Nevertheless, the states have responsibility for managing the program, including stamps distribution. Every poor person practically qualifies for SNAP benefits, comprising poor households without children and single women and men. The monthly SNAP family benefits allowance vary based on size and earnings. In 2010, around $287 was the median SNAP monthly benefits per family. When the family income rises, the allocation decreases, but the SNAP benefits implicit tax is only 30 cents per dollar. Since SNAP benefits cannot purchase anything but food, they value less than the same sum of money to people. Many social experiments provide proof that this is accurate (Gayer & Rosen, 2014, p.287-288).

The Importance of Cost -Benefit Analysis for Proposed Major Government Policies

How does the government determine whether to pursue a specific initiative? The welfare economics theory offers a structure for the decision-making process; it assesses the role of social welfare before and after the venture and decides if social welfare improves. The project would initiate, if it does. Although this approach is right, it is not very helpful. Social welfare function specification and evaluation demands enormous data collection. While social welfare functions are essential for considering conceptual issues, they generally do not contribute much to projects daily problems. Nevertheless, welfare economics offer a cost-benefit analysis of the foundation. A cost-benefit analysis is a collection of welfare economic processes to guide public spending decision making.

Many government policies and initiatives lead to the private enterprise holding more scarce goods and less in others. A variety of systematic procedures are central to cost-benefit analysis for assessing commodities, which enables policy analysts to assess if a proposal is in equilibrium. A cost-benefit analysis enables policymakers to execute what proper functioning economies do automatically to assign resources to ventures once the marginal social benefit outweighs the marginal social costs.

Cost-benefit analysis is the practical application of welfare economics to assess prospective initiatives(Gayer & Rosen, 2014, p.147). To achieve comparable net benefits from many years, calculate their present values. Other approaches including, benefits-cost ratio and internal rate of return might result in wrong decisions. The discount rate selection is crucial in cost-benefit analyses. Three possible metrics in public sector analyses include the before-tax private rate of return, social discount rate, before- and after-tax private rates of return, and a weighted average. Making a choice hinges on the nature of the displaced private activity, investment, consumption, and how much private markets represent society’s choices. The U.S. government usually does not consistently apply discount rates.

There are various methods for measuring public projects benefits and costs. Market prices do work if no compelling justification exists to suggest they deviate from social marginal

costs. The shadow prices modify the market prices’ social marginal costs deviations owing to market flaws. If workers are currently jobless and continue throughout the project, the opportunity cost is trivial. Consumer surplus can assess benefits if the big-government initiatives alter equilibrium prices. The values for non-market goods can occasionally deduce by observing an individual’s conduct. Two instances include calculating the benefits of decreasing the probability of death and the benefits of saving time.

Moreover, it is merely impossible to measure some intangible benefits. The safest strategy is to omit them in a cost-benefit analysis and then determine how huge they need to be to undo the decision. Sometimes cost-benefit analyses suffer many drawbacks: A chain-reaction game; this is the inclusion of secondary benefits to render a proposition more favorable and excluding the appropriate secondary costs. Labor games view salaries as benefits instead of project costs. Lastly, double-counting games which incorrectly counts benefits twice. It is contentious to include distributional considerations in cost-benefit analysis. Some experts tally equal dollars for everybody, whereas others employ weights that support initiatives for chosen population classes. In uncertainty, people support lower risk projects, ceteris paribus. Generally, uncertain projects costs and benefits must translate into certainty equals. When two projects are admissible, and the business needs only one, it must adopt the project with the greater net yield.

Welfare Programs and the Tax system Discourages Work Effort.

Any study on how taxes and benefits impacts peoples’ economic incentives to work is

critic