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INCOME REDISTRIBUTION: CONCEPTUAL ISSUES
Chapter 12
The Distribution of Money Income Among Households
Source: US Bureau of the Census [2011a]
Note: These figures do not include the value of in-kind transfers.
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Who is Poor
Source: US Bureau of the Census, [2012a]
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U.S. Poverty Rate
Source: US Bureau of the Census [2012a]
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Interpreting the Distributional Data
Issues
Poverty Line: fixed level of real income considered enough to provide a minimally adequate well-being
Census income on which poverty level is based consists only of family’s cash receipts
In-kind transfers
Official figures ignore taxes
Income measured annually
Consumption data may provide better assessment of well-being
Problems defining unit of observation
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Rationale for Income Distribution
Simple Utilitarianism
Utilitarian Social Welfare Function: W = F(U1, U2, …, Un)
“Promote Greatest Good for Greatest Number”
Additive Social Welfare Function W = U1 + U2 + … + Un
Assumptions
1. Individuals have identical utility functions that depend only on their incomes
2. Utility functions exhibit diminishing marginal utility of income
3. Total amount of income is fixed
0
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Implications for Income Inequality
Equalizing income will increase W
Paul’s marginal utility
0
Peter’s marginal utility
Paul’s income
Peter’s income
0
0’
MUPaul
MUPeter
a
e
c
d
f
I*
b
Take ab from Peter and give to Paul
Paul gains this much utility
Peter loses this much utility
This is the net gain to society
Social welfare maximized
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The Maximin Criterion
Social Welfare Function W = Minimum(U1, U2, …, Un)
Maximin criterion - No inequality acceptable unless it works to the advantage of the least well off
Original position – “behind the veil of ignorance”
Critique of Rawls
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Pareto Efficient Income Redistribution
Will redistribution always make someone worse off
Redistribution if gain in utility from charity exceeds loss from reduced consumption
Government reduces cost of redistribution
Income distribution as a Public Good
Social safety net
Social stability
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Non-individualistic Views
Fundamental principles specifying income distribution derived independent of tastes
Incomes distributed equally as matter of principle
Plato’s 4:1 ratio of highest to lowest income
Commodity Egalitarianism: only special commodities need be distributed equally such as right to vote or food during war
Education
Healthcare
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Other Considerations
Processes versus Outcomes
Fairness of distribution of income judged by fairness of process that generated it
Robert Nozick
Society cannot redistribute income because society has no income to redistribute
With sufficient social mobility, distribution of income is of no particular ethical interest
Corruption stemming from extreme inequality is an argument for income redistribution
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Expenditure Incidence
Expenditure incidence: impact of expenditure policy on distribution of real income
Difficult to determine
Relative price effects
Public goods
Valuing in-kind transfers
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In-Kind Transfers
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In-Kind Transfers
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Reasons for In-Kind Transfers
Paternalism
Commodity egalitarianism
Reduce welfare fraud
Political factors
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Chapter 12 Summary
Poverty rates in the U.S. vary greatly by age, race, ethnicity, and gender
Measuring the extent of poverty is difficult for various reasons
The rationale for redistributing income stems from attempts to maximize a social welfare function
Determining the impact of income redistribution on real incomes is difficult primarily due to changes in relative prices resulting from the redistribution
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