Scarcity is the underlining topic throughout the study of Economics and considering the fact that there are limited resources and infinite wants, there will always be the problem of scarcity.
Scarcity is the reason for the difference between the rich and the poor in society and this difference is termed as the Income Gap or Income Inequality.
The purpose of Income Redistribution is to solve or at least minimize the gap between the poor and the rich.
What is Income Redistribution?
Income Redistribution is an economic practice which is aimed at leveling the distribution of wealth or income in a society through a direct or indirect transfer of income from the rich to the poor.
Economists or Governments adopt economic policies and strategies like progressive taxation to implement this phenomenon.
Considering the social vices and the cost of extreme poverty or the negative effects an extremely widened income gap can have on a nation, economists across the world try their best to close this gap or maintain a positive difference.
Difference between Income Redistribution and Redistribution of Wealth
It is important to recognize what Income Redistribution is and what it is not. Many misconstrue Income Redistribution to be same as Redistribution of Wealth.
Wealth redistribution refers to the seizure of assets from the rich in society and distributing them to other poor members of society.
Unlike Wealth Redistribution, Income Redistribution does not take away the hard earned properties of people. Income redistribution uses strategic economic policies to transfer income from the rich to the poor, and it does not involve forceful acquisition of people’s assets.
There is a wrong perception that Income Redistribution is aimed at making incomes equal by taking it from those who have more and giving it to those who have less. However, the aim of this is to avoid a perilous income situation which proponent economists describe as unreasonable or extreme inequality.
There is a feeling that these systems are designed to punish the rich. It may feel like that especially when you fall among the class of the rich and you have to pay higher rates than others.
However these taxation procedures, if done with proper administration, serve the overall benefit of society and economic growth. It creates a large consumer market/class which has adequate money to spend on goods.
How is Income Redistribution done?
There are various approaches to income redistribution. Some involves Governments whiles others involve organizations and individuals.
A more common example or approach to Income Redistribution is the Progressive Tax system. Many countries, if not all, have adopted the Progressive Tax system whereby people who earn above certain calibrated amounts of income pay higher tax rates. This way, the rich end up paying about 5–20% more on their income than the ordinary or poor citizens pay.
Over the years, Income Redistribution has not been done by Governments alone. Organizations, and especially religious bodies, embark on charitable activities. Members of these organizations voluntarily give out parts of their income to the poor in society and this too is another form of income redistribution since it serves the same purpose.