Buenaventura, CheeneeDacono, TalithaNacawili, Erika

ECONOMIC COST OF REDISTRIBUTION

I. IntroductionII. Types of Income RedistributionIII.Approaches to Income RedistributionIV. Economic and Social CostV. Cost-Benefit AnalysisVI.Conclusion

OUTLINE

Government Redistribution of Income- Government takes an active role in

redistributing income, that is, in taking money away from some individuals and giving it to others.

(Stiglitz 2000)

(I) INTRODUCTION

A. Explicit Redistribution Programs (Transfer Payments)

- affect the way in which society’s total income is divided among its members, but do not affect the total amount of private goods that can be enjoyed

1. Public Assistance Programs- provide benefits to those poor

enough to qualify

(II) TYPES OF INCOME

REDISTRIBUTION

1. Public Assistance Programsa. Provide cashb. Provide payment only for specific

services or commodities (In-kind Benefits)

* Philippine Development Assistance Programme, Inc. (PDAP)

(Stiglitz, 2000)

TWO TYPES OF TRANSFER PAYMENTS

2. Social Insurance Programs- provides benefits to the retired,

disabled, unemployed, and sick- can be viewed as government

“production activity (Why?)

(Stiglitz, 2000)

TWO TYPES OF TRANSFER PAYMENTS

B. Hidden Redistribution Programs- indirect effect of the tax system and other government programs1. Implicit transfers through the Tax System- taxing the lower-income individuals at a lower rate2. Subsidy Programs and Quotas- redistributes income to farmers,

fishermen, etc. equally(Stiglitz, 2000)

(II) TYPES OF INCOME

REDISTRIBUTION

* Horizontal Redistribution-reallocating income across the life

cycle * Vertical Redistribution

-taking from the rich to give to the poor *Inter-group/Between-group Redistribution  (Esping-Andersen & Myles, 2008)

ANOTHER WAY TO CLASSIFYINCOME REDISTRIBUTION

1. Ignore distributional issues- make efficient investments to create

the largest pie, which can then be divided as society wishes through instruments that do not involve high transaction costs or economic inefficiencies 2. Use distributional weights

- costs and benefits to low-income groups would be given extra weight  (Treasury Board of Canada Secretariat Ottawa, 1998)

(III) APPROACHES TO INCOME REDISTRIBUTION

3. Focus on basic needs- concentrating redistribution on the poorest quintile (20 per cent) of income earners, - providing for the basic needs of such

people is probably best done directly and in kind (free education and health care, for example)

4. Focus on visibility and transparency- simply a matter of showing what the costs

and benefits are from several points of view (Treasury Board of Canada Secretariat

Ottawa, 1998)

(III) APPROACHES TO INCOME

REDISTRIBUTION

The total amount of the tax collected from a group will never be the same amount

that target population will receive.

2/3 goes to the overhead cost1/3 is the redistributed income

(Edwards 2007)

(IV) ECONOMIC COST AND

SOCIAL COST

1 dollar’s worth of what the subsidized person wants will mean 3 dollars worth of

the things deprived from the taxed population.

Negative sum game – the sum of the losses exceeds the sum of the gains

(Edwards 2007, 7)

“SOME PEOPLE GAIN, AND OTHERS LOSE”

• Resource cost – the approximate dollar value of the private sector production forgone

• Labor input and scarce resources are allocated for income redistribution agencies instead of having alternate employment increasing GNP.

• Tax reduces people’s capacity to work, save and invest, ceteris paribus; this leads to a loss

in total output and income that can be estimated.

(Edwards 2007)

(Edwards 2007, 9)

• There is a labor force withdrawal by subsidized groups

• People become more dependent of the subsidies

(Edwards 2007)

• The government intervention is a big help to the target (poor) population in assisting them.

• The objective of redistribution of income is good although it appears to be just an ideal.

• It is matter of equity and efficiency.• In trying to achieve equality, equality

seems to elude us even more.

COST-BENEFIT ANALYSIS

• The Income Redistribution is used to improve the economic condition of the poor population by 1 dollar (USA), the distortions may be such that the cost to other members of society is more than one dollar (Ballard, 1988).

• It aims to maintain equality in terms of distributing the income to the citizens, but in expense higher tax is given to the rich and lower to the poor.

• Illustration: STFAP

(V) CONCLUSION

Reference:Stiglitz, Joseph E. (2000). Economics of the Public Sector. New York: W. W. Norton and Company.Treasury Board of Canada Secretariat Ottawa (1998). BENEFIT-COST ANALYSIS GUIDE, 74-75. Retrieved February 12, 2014 from http://classwebs.spea.indiana.edu/krutilla/v541/Benfit- Cost%20Guide.pdfEsping-Andersen, G. & Myles, J. (2008). The Welfare State and Redistribution. Manuscript. Retrieved February 19, 2014 from http://dcpis.upf.edu/~gosta-esping-andersen/materials/welfare_state.pdf )Edwards, J. R. (2007). The Cost of Public Income Redistribution and Private Charity. Journal of Libertarian Studies. Vol. 21, No. 2Ballard, C. L. (1988). The Marginal Efficiency Cost of Redistribution. The American Economic Review, Vol. 78, No. 5. American Economic Association Retrieved February 17, 2014 from http://www.jstor.org/stable/1807163