Income
Redistribution,
Conceptual Issues
Chapter 12
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Contents
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1
Distribution of income
2
Rationales for Income redistribution
3
Expenditure incidence
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Will provide framework for thinking
about the normative(标准化的) and
positive aspects of government
income redistribution policy.
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Income Redistribution, Conceptual Issues
 The poverty line is a fixed level of real
income which is considered enough to
provide a minimally adequate standard of
living.
 Inherently arbitrary, but still a useful
benchmark.
 Trends over time
 Differences across groups
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a) The distribution of money income among
households,(Table12.1) That inequality has
increased over time.
b) To compute the number of people below the
poverty line.(Table 12.2)
Poverty line for a family of four was
$18,244 in 2001.
Median household income more than
double that, $42,228.
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Poverty rates in U.S. in 2001 might be
considered surprisingly high – 11.7%
for population as whole, 2004-12.7%.
The figures suggest that the poverty
rate is lower than it was a century
ago . Howerve , the trend has not
been steadily downward.(figure12.1)
Concentrated among certain groups,
such as female headed households,
children, and minorities.
Elderly have lower poverty rates than
the U.S. average.
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Interpreting the Distributional Data
1.“Income” consists only of cash receipts.
Excludes in-kind transfers like health insurance,
food stamps, and housing.
Would reduce poverty rate by more than 20%.
Excludes non-market work such as childcare or
housework.
Ignores income flow from durable goods.
2. Income is before tax.
It ignores cash refunds from the Earned Income
Tax Credit, which has grown dramatically in the
last decade, and now amounts to more than $31
billion annually.
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3.Income is measured annually.
Income does fluctuate from year to
year.
Lifetime income considerations seem
relevant.
Consider a “starving” college student,
for example. Not really “poor” in a
lifetime sense.
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4.Unit of observation
Person, households?
Bauman (1997) calculates that
including the income of nonfamily
members (such as nonmarried
cohabitors) would reclassify 55% of
people who are poor out of official
definition.
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Rationales for income redistribution
Rationales for income redistribution
Simple
Utilitarianism
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The
Maximin
Criterion
Pareto efficient
income
redistribution
Nonindividualistic
Views
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Rationales for income redistribution
1,Simple Utilitarianism:
1)Utilitarian social welfare function:
W=F(U1,U2,….Un),the society welfare depends
on the well-being of its members.
2)Additive social welfare function :
W=U1+U2+….+Un
3)Suppose that the government’s goal is
to maximize the value of W , then
assumptions:
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With the additive SWF that was given,
also assume:
1.Identical utility functions that
depend only on income.
2.Diminishing marginal utility of
income.
3.Society’s total income is fixed.
Implication: government should
redistribute to obtain complete
equality.
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Striking result is that full income
equality should be pursued, but some
scrutiny required.
Assumes identical utilities.
Assumes decreasing marginal utility.
Assumes total income fixed
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The Maximin Criterion
 The Rawlsian social welfare function is:
W  MinimumU1 , U 2 ,..., U n 
 Social welfare in this case depends only on the utility
of the person who has the lowest utility.
 Rawls (1971) asserts it has ethical validity because
of the notion of original position.
 Notion that ex-ante individuals do not know where in
the income distribution they will be.
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The Maximin Criterion
 The ethical validity of this proposition is controversial:
 1,The maximin criterion has received considerable
attention,principally because of philosopher John
Rawls’s assertion that it has a special claim to ethical
validity.Rawls’s argument relies on his notion of the
original position, an imaginary situation in which people
have no knowledge of what their place in society is to
be.People adopt the maximin social welfare function
because of the insurance it provides against disastrous
outcomes.people are frightened that they may end up at
the bottom of the income distribution, and therefore want
the lever at the bottom as high as possible.
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The Maximin Criterion
These ethical claims are controversial:
Still selfish view in original position
Individuals extremely risk averse here
All that is relevant is the welfare of the
worst-off person, even if a policy is
extremely detrimental to everyone else.
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Pareto efficient income redistribution
Suppose that utility of richer person
does depend on poorer person’s
utility. That is:
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U PETER  U  I PETER ,U  I PAUL 
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 Government redistribution in this
case could improve efficiency. It may
be difficult for the private market to
do this, if, for example, the rich lack
information on just who really is poor.
Altruism plays a role in this example,
but private market could conceivable
give charity.
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Nonindividualistic views
 In previous cases, social welfare derived
from individual’s utilities.
 Some specify what the income
distribution should look like independent
of individual preferences.
 One example: commodity egalitarianism.
 Right to vote, food, shelter, education, perhaps health
insurance.
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Expenditure incidence
Reasons for in-Kind
Valuing in-Kind transfers
Public goods
Relative price effects
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Relative prices effects
1. Expenditure incidence
The impact of expenditure policy on the
distribution of real incomes.
Relative Price Effects
Public Goods
Valuing In-Kind Transfers
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Relative Price Effects
Suppose government subsidized
housing of the poor.
As a first pass, redistribution from
rich to poor.
May have overall effects on housing
prices
Landlords may reap part of gain.
Affects wages of construction workers.
Generally, any government program
sets off a chain of price changes, and
the incidence is unclear.
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Public Goods
Do rich and poor benefit similarly
from the provision of public goods?
Difficult to measure, sensitive to
assumptions that are made.
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Valuing In-kind Transfers
Government provides many benefits
to the poor in-kind – that is, direct
provision of goods rather than cash.
Food stamps
Medicaid
Public Housing
Estimating value is difficult. Not
always valued at dollar-for-dollar (if
resale is difficult).
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An in –kind transfer results in a lower utility lever than a cash transfer
A)An in –kind transfer results in a lower utility
lever than a cash transfer
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An in –kind transfer can also result in the same utility lever as a cash
transfer
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 Why give in-kind transfers if they tend to
be inefficient?
 Commodity egalitarianism
 May reduce welfare fraud (especially if the in-kind transfer
is an inferior good)
 Politically viable because they help the producer of the inkind good.
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