Government Policies to Redistribute Income and Wealth 3 Main Policies 1.Monetary Benefits 2.The Tax System 3.Direct Provision of Goods and Services

Government Policies to Redistribute Income and Wealth Redistribute to alter the distribution of : reallocatereallocate : to spread to other areas

Government Policies to Redistribute Income and Wealth Monetary Benefits Payment of benefits – out of gov’t spending – to low income individuals Increases disposable income 2 Kinds of Benefits 1.Means Tested 2.Universal Benefits

Government Policies to Redistribute Income and Wealth Monetary Benefits 1.Means Tested: benefits only to the low income – Example: Unemployment Insurance – Problem: 1. Not always claimed; 2. Disincentive to work – creates a poverty trap 2.Universal Benefits – Paid to everyone – Examples: State pension, child benefits – Problems: Poverty trap resolved, but pays money to rich

Government Policies to Redistribute Income and Wealth Tax System Progressive Taxes: high income earners are taxed a higher percentage of their incomes – Reduces income differentials Inheritance Tax – another tax that redistributes wealth Portion of inheritance over an amount must be paid in tax

Government Policies to Redistribute Income and Wealth Inheritance : money, property, etc., that is received from someone when that person dies : something from the past that is still important or valuable : the act of inheriting something

Government Policies to Redistribute Income and Wealth Direct Provision Free provision of certain goods and services Low income earners gain the most as a percentage of their salary – Examples: 1) Health care; 2) Education

Does Government Intervention Work In Principle – Increase economic efficiency In Practice – May create further inefficiencies 3 Reasons for Failure of Gov’t Intervention 1.Information 2.Incentives 3.Distribution

Government Policies to Redistribute Income and Wealth Information Problems – Value of an externality What tax value to charge Wrong tax leads to wrong production level – Estimating Consumer demand Public Goods may be over or under produced

Government Policies to Redistribute Income and Wealth Incentive Problems – Income tax and the disincentive to work Redistribution of wealth – Politicians incentives are influenced by the need to get elected A politician may promise to remove an unpopular tax – Public Services may be Inefficient The profit motivation is removed. Threat of competition dissapears

Government Policies to Redistribute Income and Wealth Distribution Problems – Certain groups may be affected more than others – Effort to fix a market failure increases “inequality” – A tax on a negative externality may be regressive, Could hurt the poor, or elderly more

Government Policies to Redistribute Income and Wealth