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Redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, charity, divorce or tort law. Most often it refers to progressive redistribution, from the rich to the poor, although it may also refer to regressive redistribution, from the poor to the rich. The desirability and effects of redistribution are actively debated on ethical and economic grounds.
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Types of Redistribution
Figure 1
See also: Transfer payment
Today, income redistribution occurs in some form in most democratic countries. Progressive income redistribution diminishes the amount of income one individual or corporation receives, while at the same time benefitting others. In a progressive income tax system, a high income earner will pay a higher tax rate than a low income earner. A steeper progressive income tax results in more equal distribution of income and wealth across the board. The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.
Property redistribution is a term applied to various policies involving taxation or nationalization of property, or of regulations ordering owners to make their property available to others. Public programs and policy measures involving redistribution of property include eminent domain, land reform and inheritance tax.
Two popular types of governmental redistribution of wealth are Subsidies and Vouchers (such as food stamps). These programs are funded through general taxation, but disproportionately benefit the poor, who pay fewer or no taxes. While the persons receiving redistributions from such programs may prefer to be directly given cash, these programs may be more palatable to society, as it gives society some measure of control over how the funds are spent. See Figure 1 for an example of how a subsidy for a good (Good Y in the figure) will increase the amount of the subsidized good purchased by a greater portion than it increases the amount of the non-subsidized good purchased (Good X), as a result of the substitution effect.
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