It turns out that a constant redistribution of income to ensure that everyone
is better off from each tiny improvement of resource allocation is costly
in two ways. First there is the administrative cost of government redistribution
of income---the necessity of keeping track of the incomes of everyone in
the community. Second, there is the requirement that the exact effect on
every individual's income from each improvement of resource allocation be
calculated.
Given that majority rule has been adopted, the above administrative details
can be bypassed if a majority will accept each government generated
increase in allocative efficiency. Such acceptance first requires that
everyone understand that there is a real income gain from the improvement
in resource allocation. This may not be the case with respect to tariffs
and import restrictions if a majority of the community believes that it
is made better off by expanding and utilizing domestic production at the
expense of foreign production. If the public believes that there is a
gain from trade and from improvements in domestic resource allocation and
it is also the case that there are a small number of losers of substantial
amounts and a large number of gainers of tiny amounts from each improvement,
most people may support such efficiency improvements in the expectation that
they will gain on average.
Major changes in the overall income distribution will not go unnoticed,
particularly if a majority happen to be on the losing side. But given people's
anguish at observing poverty and distress in segments of the
community, majority support may frequently arise for helping the very
poor by significant amounts.
More generally, there may be support for progressive income taxes that
draw more from the very rich than from the middle and lower classes
as long as the very rich are a minority. One might expect that, in the
absence of philosophical and ethical views about the morality of income
equality, progressively higher taxes will tend to be imposed on less than
the top half of the income distribution. On the contrary, if separate
income tax rates can be established for each, say, 10 percent segment of the
community's income distribution, each of the nine alternative 90-percent
segments can generate 9/1 majority votes to raise the taxes of the remaining
10-percent segment. Taking into account this possibility, a progressive
income tax system will arise only if there is widespread agreement that tax
rates should be higher for higher-income individuals than for those with
lower incomes.
Also, we cannot overlook the possibility that some segment of the community
can, on an ethical basis, be widely discriminated against by the
remaining population through efforts to not only increase its taxes but
to impose discriminatory government policies to keep its family incomes at
minimal subsistence levels, generation after generation.
It is test time. As usual, think up your own answers before
looking at the ones provided.
In the previous topics, issues about the distribution of income appeared
from time to time. Here we analyse this topic in detail. Cases have been
dealt with in which by increasing output in an industry, the overall level
of income and social wealth can be increased if price exceeds the marginal
cost. The statement that social wealth increases assumes that the increase
in aggregate income is divided amongst the population to ensure that
everyone in the community becomes better off.