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Income Distribution

Economics
Summary

What can be done to improve income inequality?

Summary 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.