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When the income distribution gets very skewed, with a small number of people receiving a large portion of the total income, many politicians and social activists start looking for ways to redistribute some of the income, so that the poor aren't as poor and the rich aren't as rich. Some of the options for doing this include progressive taxation, in-kind transfers, housing subsidies, cash assistance, 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.
Progressive Taxation
A progressive taxation scheme, such as is used in the United States, taxes high-income earners at higher percentage rates than low-income earners. This is typically done by means of tax brackets. In 2025, a single person could earn up to $11,925 and pay just 10% federal income tax: \(\large$11,925 \times 10\% = $1,193\)
Someone earning, say, $30,000 would be in a higher bracket, the 12% bracket. They would pay 10% on the first $11,925 of the $30,000 and 12% on the remaining $18,075:
\(\large($11,925 \times 10\%) + ($18,075 \times 12\%) \\\large = $1,193 + $2,169 \\\large= $3,362\)
Anyone making between $48,475 and $103,350 was in the 22% bracket, so someone earning $80,000 would pay 10% on the first $11,925, 12% on the next $36,550 ($48,475 – $11,925) and 22% on the remaining $31,525 ($80,000 – $48,475).
\(\large($11,925 \times 10\%) + ($36,550 \times 12\%) + ($31,525 \times 22\%) \\\large= $1,193 + $4,386 + $6,936 \\\large= $12,515\)
This way, 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
Essential goods (or coupons for essential goods) provided to the poor are called in-kind transfers. 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.
Cash Assistance and Unemployment Benefits
Actual cash provided to households with very low incomes is called cash assistance. 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 cash assistance, 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. At the same time, it seems both unjust and unwise to deny unemployed workers their benefits, since without those benefits, the unemployed will struggle just to survive, let alone to job-hunt effectively.
