[dropcap style=”boxed”]D[/dropcap]istribution of wealth and income is the way in which the wealth and income of a nation are divided among its population. Or the way in which the wealth and income of the world are divided among nations. A more equitable distribution of income may help accelerate growth and promote economic development. Equitable doesn’t mean equal distribution of income. It refers to the distribution of income that is ‘fair,’ but the concept of ‘fair’ is subjective.
Why Do We Need Equitable Distribution of Income?
The propensity to consume is the proportion of income of your income spent on purchases. For example, if you earned $2000 and spend $1800 on all your purchases then your propensity to consume is at 90%. However, if you earned $18000 and still only spent $1800 then your propensity to consume is at 10%. The poorer have a higher propensity to consume so the redistribution of income will increase consumption and thus aggregate demand. This will spur economic growth.
Governments have an easier job of implementing economic policies if people are happier. If people think that their hard work isn’t rewarding then there can be social unrest, which increases uncertainty.
The poor will be able to access healthcare and education, which will improve the quality and quantity of factors of production in the long run.
However, an equitable distribution of income could lower incentives for people to work hard and take risks.
Solutions to an Equitable Distribution of Income
A good short-run solution would be a progressive tax system with transfer payments, such as subsidies, unemployment benefits and disability benefits. By taxing higher income groups more than lower-income groups, the income can be redistributed from the rich to the poor.
A good long run policy would be to improve the access to education and healthcare, create more jobs and lower corruption.