Income redistribution is also known as income sharing or wealth addition. Redistribution of wealth and income is basically the transfer of income from some people to others, usually through a legal mechanism like taxes, charity, income support, financial policies, property laws, confiscation or inheritance law. It is necessary for all humans to have a good standard of living. This basic need has motivated all the nations on earth to have their own system of redistributive policies. The concept is not new; however, over time, it has been refined and made more efficient to ensure the well-being of the public.
The concept of income redistribution has become more visible with the onset of globalization and the increasing income disparity between rich and poor countries. Income growth is necessary to promote economic efficiency and change for the betterment of the poor. The idea behind income allocation is to provide a basic income level to citizens so that they can maintain a level of purchasing power and participate effectively in the overall growth of the country.
Since its inception, income redistribution has undergone many changes. In the past, redistribution was accomplished through direct taxation and was viewed as an inefficient way of redistributing income because of the heavy scope of taxation. Income growth was essentially achieved at the individual level with minimal redistribution at the community or national level. However, changes to tax laws and the rise of the EITC (Employment growth Benefits) in the past years have made direct tax transfers more viable as it now forms the major source of revenue for most governments.
Today, there are two broad ways in which income is distributed: income taxes and income redistribution programs. Income taxes are collected by governments and redistributed to citizens according to their income group. On the other hand, income redistribution requires governments to redistribute income through public programs. Most often, when taxpayers choose to participate in a program, they are granted a certain rebate and this rebates them the actual amount that they would have otherwise paid to the government. This form of income distribution is considered a more effective method of redistribution and is widely used by countries around the world.
For individuals, income redistribution programs are typically made available through social welfare programs. Among these are food stamps and Medicaid. Social welfare programs allow individuals to receive benefits based on their income without expecting repayment from the government. These programs also commonly provide tax rebates on top of the cash transfer payments. Additionally, some states also allow individuals to use their home equity loans as tax credits.
For larger households and families across countries, however, income redistribution is accomplished through direct transfer payments. Direct transfers include cash transfers from family members to households. Some countries also allow households to use interest from savings accounts to pay for their direct taxes.
Between the last two decades and today, technology has allowed for a variety of new financial instruments. One of the most unique and prominent instruments introduced in the last two decades is the foreign currency exchange market. Forex markets allow for a massive amount of foreign investment and the proceeds are then distributed across countries according to their current market conditions. This form of income redistribution is currently one of the fastest growing areas of global income disparity. In the next decade, this number is projected to double.
Another method of income redistribution that has been seen in the last two decades is the universal basic income (UBI). The UBI is a program designed to be paid to every citizen regardless of their ages. Typically, the UBI is funded through a payroll tax and similar to social welfare programs. However, the distribution of the funds is also determined by each country’s government policy. In the developed countries, such as the United States and the United Kingdom, the UBI is financed through compulsory contributions from labor and other sources.
Finally, there are income transfers that are not taxable. These transfers, like the UBI, are typically funded through compulsory contributions from citizens and other organizations. Examples include child care assistance, unemployment insurance and grants to non-profit organizations. Like the UBI, they are not deducted from taxes.
Income policies affect three groups of taxpayers. The well-being of workers and the productivity of capital owners are affected by these transfer policies. For example, higher levels of taxation on firms that employ fewer workers can reduce the employment rate and push up the unemployment rate, thereby impacting the growth of capital and labour market inequality. On the other hand, high levels of taxation on firms that hire more than the need, and the substitution of lower-priced firms to raise employment, may increase competition and reduce the productivity of capital and labour market.
Overall, income policy has played an important role in reducing the growth gap between the rich and poor since the early 1990s. Governments have implemented policies to ensure that the distribution of income is fair. By doing so, they are ensuring fairer distribution of wealth. The continued growth of economies worldwide will only benefit those who have been fighting towards economic equality through policies implemented over the two decades.