1. INCOME REDISTRIBUTION: CONCEPTUAL ISSUES
CHAPTER 12
INCOME REDISTRIBUTION: CONCEPTUAL ISSUES

2. The Distribution of Income Among Households
Percentage Share
Year
Lowest Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Highest Fifth
Top 5 Percent
1967
4.0
10.8
17.3
24.2
43.6
17.2
1977
4.2
10.2
16.9
24.7
44.0
16.8
1982
10.0
16.5
24.5
45.0
17.0
1987
3.8
9.6
16.1
24.3
46.2
18.2
1992
9.4
15.8
46.9
18.6
1997
3.6
8.9
15.0
23.2
49.4
21.7
2002
3.5
8.8
14.8
23.3
49.7
2004
3.4
8.7
14.7
50.1
21.8
Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements
URL:
These figures do not include the value of in-kind transfers.

3. Who is Poor? Group Poverty Rate All persons 12.7% Under 18 years 17.8%
White
8.4
65 years and older
9.8
Black
22.8
Female households,
no husband present
Hispanic origin
20.5
28.4
Source: US Bureau of the Census, “Historical Poverty Tables.”
[WWW Document] URL:
Figures are for 2004.

4. Poverty Rate ( )
Source: US Bureau of the Census, “Historical Poverty Tables.”
[WWW Document] URL:

5. Measuring Poverty
Poverty line

6. Interpreting the Distributional Data
Census income consists only of family’s cash receipts
in-kind transfers
Official figures ignore taxes
Income measured annually
Consumption data may provide better assessment of well-being
Problems defining unit of observation

7. Simple Utilitarianism
Simple Utilitarianism
Utilitarian Social Welfare Function: W = F(U1, U2, ,,,, Un)
“Promote Greatest Good for Greatest Number”
Additive Social Welfare Function W = U1 + U2 + … + Un
Assume
Individuals have identical utility functions that depend only on their incomes
Utility functions exhibit diminishing marginal utility of income
Total amount of income is fixed
Review General Concept of Social Welfare Function
Utilitarianism simply means W a function of people’s utility
Conventional Welfare Economics posits W = F(U1, U2, …, Un), but this so general it doesn’t tell us much
Utilitarians believed in additive welfare function, although W = F( ) is called a utilitarian welfare function

8. Implications for Income Inequality
Implications for Income Inequality
This is the net gain to society
Paul gains this much utility
Paul’s marginal utility
Peter’s marginal utility e f
Peter loses this much utility d c
MUPeter
Take ab from Peter and give to Paul
Social welfare maximized
MUPaul
Paul’s income
Peter’s income 0’ a b I*
Paul’s income
Peter’s income

9. Evaluating the Assumptions

10. The Maximin Criterion
Social Welfare Function W = Minimum(U1, U2, …, Un)
Maximin criterion - No inequality acceptable unless it works to the advantage of the least well off
Original position – “behind the veil of ignorance”
Critique of Rawls
Only important consideration is the utility of the least well-off member. Society’s objective is to maximize the utility of the person with the least utility. This implies there should be complete equality except to the extent that departures from equality increase the welfare of the worst-off person. No inequality acceptable unless it works to the advantage of everyone.
Original position – “behind the veil of ignorance” – people will adopt maximin because of the insurance it gives against disastrous outcomes
Criticisms
Should decision made in original position have any special claim to ethical validity
Are people really that risk adverse?
It can lead to some weird outcome. “A new opportunity arises to raise the welfare of the least disadvantaged by a slight amount, but almost everyone else must be made substantially worse off, except for a few individuals who would become extremely wealthy.” Because all that is relevant is the welfare of the worst-off person, the maximin criterion indicates that society should take advantage of the opportunity

11. Pareto Efficient Income Redistribution
Will redistribution always make someone worse off?
Utility Function Ui = F(X1, X2, …, Xn, U1, U2, …, Ui-1, Ui+1, …, Um)
Redistribution if gain in utility from charity exceeds loss from reduced consumption
Government reduces cost of redistribution
Income distribution as a Public Good
Social safety net
Social stability
Assumption that utility depends on your income only implies that al redistribution must hurt at least one person so redistribution can never be a Pareto improvement. If we assume that utilities depend not only on their own income, but those of others, then redistribution can be a Pareto improvement.

12. Nonindividualistic Views
Fundamental principles specifying income distribution derived independent of tastes
Incomes distributed equally as matter of principle
Plato’s 4:1 ratio of highest to lowest income
Commodity Egalitarianism
Some argue specification of income distribution should be derived from a set of principles that are independent of people’s tastes. Nonutilitarian approach
Commodity Egalitarianism – James Tobin – certain types of commodities are so important that they should be distributed equally (less unequally than ability to pay for them) – basic necessities of life, health citizenship

13. Other Considerations Processes versus Outcomes Mobility Corruption
Fairness of distribution of income judged by fairness of process that generated it
Robert Nozick
Society cannot redistribute income because society has no income to redistribute
Mobility
Corruption

14. Expenditure Incidence
Relative price effects
Public goods
Valuing in-kind transfers

15. In-kind Transfers H Other goods per month 420 E3 340 A F U 300 E1 260B D 20 60
150
210
Pounds of cheese per month

16. In-kind Transfers H Other goods per month 420 A F 300 E5 168 E4 136 B82
126
150
210
Pounds of cheese per month

17. Reasons for In-Kind Transfers
Commodity egalitarianism
Reduce welfare fraud
Political factors