What can be done to improve income inequality?
When the income distribution gets very skewed, with a small number of
people getting a large portion of the income, many politicians and
social activists start looking for ways to justly redistribute some of
the income so that the poor aren't as poor and the rich aren't as rich.
Some of the options that they consider include taxes, in-kind
transfers, housing subsidies, welfare, and unemployment benefits.
While we won't go into these in detail, we will take a brief look at
them and how they are used to redistribute income in a skewed economy.
Taxes
Taxes can be used to redistribute income to the poor. For example, the
U.S. uses a progressive income tax that takes a larger percentage from
higher incomes and a smaller percentage from lower incomes, meaning
that the poor keep a larger percentage of their income than the rich do
(though the amount that the poor take home is still lower than that of
the rich). The government uses the tax money to fund many different
programs, including some that target poverty and inequality.
In-kind Transfers and Housing Subsidies
In-kind transfers give essential goods (or coupons for these essential
goods) to the poor. These are a relatively paternalistic policy
option, since the government limits what goods the poor can obtain with
their governmental aid, under the assumption that the poor may not make
the "best" choice if given cash instead of good-specific benefits.
Food stamps are an example of in-kind transfers.
Housing subsidies give the poor money toward obtaining adequate
housing, since rent and upkeep make up a large portion of spending in
lower income families. This, too, is a paternalistic option that
limits the use of the benefits provided to one specific goal.
Welfare and Unemployment Benefits
Welfare provides actual money to those with very low incomes. This is
the option that gives the recipients the most leeway when deciding how
to use their benefits, which is fine if we are assuming that all people
are rational and make decisions in their best interests, or not so fine
if we are assuming that people are not rational and need guidance when
making their consumption decisions in the face of extreme economic
hardship.
Unemployment benefits give a monetary cushion to those workers who are
unable to find jobs, and, like welfare, are also in the form of money.
Some argue that unemployment benefits provide a deterrent to finding
"real work," since it is easier to stay unemployed and receive
benefits. It is difficult to find a solution to this dilemma: it seems
unjust to deny unemployed workers their benefits, since without the
benefits the unemployed would have no means for survival, but it is
equally difficult to find jobs for every single unemployed worker who
is receiving benefits.
