1. INCOME REDISTRIBUTION: CONCEPTUAL ISSUES
Chapter 12

2. The Distribution of Money Income Among Households
Source: US Bureau of the Census [2011a]
Note: These figures do not include the value of in-kind transfers.

3. Who is Poor?
Source: US Bureau of the Census, [2012a]

4. U.S. Poverty Rate
Source: US Bureau of the Census [2012a]

5. Interpreting the Distributional Data Issues
Poverty Line: fixed level of real income considered enough to provide a minimally adequate well-being
Census income on which poverty level is based 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

6. Rationale for Income Distribution 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
Assumptions
1. Individuals have identical utility functions that depend only on their incomes
2. Utility functions exhibit diminishing marginal utility of income
3. 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
Utilitarian's believed in additive welfare function, although W = F( ) is called a utilitarian welfare function

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

8. 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

9. Pareto Efficient Income Redistribution
Will redistribution always make someone worse off?
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.

10. Non-individualistic 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: only special commodities need be distributed equally such as right to vote or food during war
Education?
Healthcare?
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

11. Other Considerations Processes versus Outcomes
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
With sufficient social mobility, distribution of income is of no particular ethical interest
Corruption stemming from extreme inequality is an argument for income redistribution

12. Expenditure Incidence
Expenditure incidence: impact of expenditure policy on distribution of real income
Difficult to determine
Relative price effects
Public goods
Valuing in-kind transfers

13. In-Kind Transfers

14. In-Kind Transfers

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

16. Chapter 12 Summary
Poverty rates in the U.S. vary greatly by age, race, ethnicity, and gender
Measuring the extent of poverty is difficult for various reasons
The rationale for redistributing income stems from attempts to maximize a social welfare function
Determining the impact of income redistribution on real incomes is difficult primarily due to changes in relative prices resulting from the redistribution