Why Government Should Redistribute Income

First, I will say that I believe in very few absolutes, and “rights” are absolutes. They say nothing in an argument because anyone can say that people have a “right” to what they earn or a “right” to decent living. So once I take these “rights” out of the discussion, all that remain are costs and benefits: the backbone of utilitarianism.

Well, what costs and benefits are there to redistributing income? Why do we have income in the first place? The second question is easy. We have income to provide an incentive for productive (mutually beneficial) exchanges within the economy. People gain purchasing power through labor, and it provides them with incentives to work. If we redistribute income, we diminish that incentive, but only very gradually unless the marginal tax rate is very high. (This is the idea behind the Laffer curve, but Laffer had the shape wrong.)

Redistributing income, while it only has slight costs, has great benefits. The benefits come from the diminishing marginal utility of money. That is, the same amount of additional money is worth more to people who start off with less money. For example, someone who already has a BMW and Mercedes has little interest in a Ford Escort, but someone else who walks for an hour to work and home every day, the car is a valuable purchase indeed.

Since money has diminishing marginal utility, we should take money from the rich and give it to the poor, so long as it doesn't reduce the incentive to work too much. The big question is, what is too much? This, however, is a relatively minor question compared to whether or not to redistribute income at all, and is best answered through experimentation.

One may ask, if redistribution of income is so good, why wasn't it started until the twentieth century? In previous centuries, society was much different and people had much greater sense of community because transportation and communication were much more limited. People were willing to help their neighbors, both because they felt that they would want the same treatment and because the religions that dictated their moral values told them to. However, this began to change with the development of cities and is now largely gone. That is not to say that it is a better system than one that we could have now.

- 1998 August 24

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(Back to Views, David Baron)

LDB, dbaron@dbaron.org