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What Does Income Distribution Mean?

by Jackson B

Income distribution is one of the most important concepts that are covered in economics. Without proper income distribution, a society cannot move towards the goals set by it. The key concepts of income distribution are:

Distribution of income is basically about how much of an individuals’ or group’s income is taken care of. Redistribute income doesn’t mean that you have less of it; rather, you are simply sharing it with those who aren’t as lucky to receive it. Income redistribution is a progressive tax system. In a progressive tax system, the more you earn, the larger portion of your income is distributed through taxes. In a more simple way, it can be said that in a progressive tax system, the rate at which you pay taxes increases over time.

There are a few ways the United States government spends money. Some are for defense purposes, some for providing healthcare, education, roads and bridges and some for income redistribution. The Federal government spends approximately 1.45 trillion dollars every single year. Here are some examples of spending that are included in the Federal income redistribution process:

Health Care. The government provides health care benefits to its citizens through a program called Medicaid. Through this program, they redistribute income through taxes. For example, when you apply for Medicaid, they ask you for how much you make (as a general rule, based on family size). They then allocate this amount to your family’s health insurance plan, where they cover your healthcare costs.

Anti-Poverty Programs. The Federal government also redistributes income through taxation and anti-poverty programs. These programs primarily support low-income persons and families, such as through food stamps, energy assistance, job grants, etc. A few examples of these programs are the Temporary Assistance for Needy Families (TANF) Program, the earned income tax credit (EITC), and child support payments. These programs also indirectly redistribute income by reducing the taxes people pay on high-income individuals and families, as well as indirectly promoting economic growth through investments in public infrastructure and research and development.

Income Incentives. The last way the Federal government redistributes income is through progressive taxation. Progressive taxation means that income is distributed according to how much someone earns above and beyond their poverty level. There are two kinds of progressive taxation: regressive and proportional.

Regressive taxation occurs when more income goes to the rich than to the poor. Proportional redistribution occurs when more income is distributed to everyone else than to the poor. Income taxes, like all other forms of taxation, affect the poor negatively. For instance, a higher rate of taxation will discourage a person from working, since he will have to pay income tax on all of his income, no matter how small. Also, a high rate of taxation will make it difficult for the poor to buy the things they need, such as food. A good example of this is food stamps, which are often referred to as food stamps because they are specifically designed to help the poor.

Direct Provision. Health-care and nutrition programs, such as food stamps and the earned-income tax credit, are direct distribution programs. On the other hand, health insurance premiums and Medicaid, both for the poor and for those who can afford insurance, are indirect redistribution programs. These programs do not directly provide income or health insurance; rather, they provide coverage for those who may be eligible without providing income or health insurance.

The United States has one of the most generous programs of direct provision, providing for most of their elderly and people with disabilities. Some of the larger, more sophisticated programs go after people with advanced diseases, provided that they meet certain income and asset requirements. The federal Old-Age Security program (OASAS) provides very large cash transfers to senior citizens every year.

The European Union has a social safety net of sorts, though its programs tend to be more limited in scope than those in the United States. There are, however, many countries that offer extremely generous income transfers to their citizens, including Portugal and Spain. Spain pays some tax on the transfer, but this is only very small. Portugal, like the United States, has an extremely progressive tax system. Portugal uses a VAT system, similar to the one in the United States. This system, along with the higher levels of taxation that most other European countries have, means that the poor are effectively receiving the same level of income distribution as the more affluent.

Income redistribution does not mean simply giving to the poor. It also means providing opportunities to the more affluent, particularly for people who have a higher education. These individuals typically have some combination of skills that could lead them to success in other industries. In addition, if we are to continue to provide opportunities to the poor and middle class, we must address the issue of extreme poverty. Though globalization has been blamed for a significant increase in extreme poverty, there is a real problem of systemic failure in too many countries around the world.