Question

How can governments and families minimize economic inequality and are there costs and benefits to redistribution?

Answer 1

Redistribution of straight income Taxation and redistribution of wealth to the poorest segment of society are the most effective way to control inequality and reduce poverty in the short term. Such methods are particularly suitable if growth gains fail to reach the vulnerable. But they're too small for a real difference most of the time. On average, personal income taxes and cash benefits to the poor are almost 10 times lower than in advanced economies as a proportion of GDP.

Therefore, if growth is adequate but poverty reduction is sluggish, there is strong case for increasing redistribution in developing economies. Nevertheless, there are political obstacles to this, as well as challenges related to the administrative capacity of the state. Political opposition may well persist, but it is likely that modern information technology will improve operational efficiency.

Redistribution of income would reduce poverty, if done properly, by reducing inequality. But it may not dramatically increase growth, except perhaps by increasing social tensions arising from poverty and allowing poor people to devote more resources to accumulation of human and physical property. It is important to invest directly in resources for the vulnerable. Transfers to the poor should not only consist of cash; they should also improve the income-generating capacity of people today and in the future.

It has been shown that conditional cash transfers empower families to send their kids to school, improve their education, and track their health. But services need to be made available and funded to accommodate this additional demand. The same applies to other services aimed at improving opportunities for the vulnerable. Financing these services by incremental taxation thus providing incentives for cash transfer to poor households thus decreases short-term inequality and poverty and lets these households produce more medium-and long-term income.

Through reducing inequality and ensuring that development decreases poverty, policymakers can draw on a variety of policies to foster growth. The policies we implement should depend on the relative importance of these two priorities and the time horizon over which outcomes can be predicted. Policies on mere income redistribution produces less future growth than policies that increase poor people's economic opportunities but they instantly reduce poverty.