Social Redistribution

In short: Markets reward those who already have capital, in-demand skills or luck, so left alone, income and wealth tend to concentrate. Redistribution moves resources through taxes, social insurance, direct payments and public services, to fund what everyone uses, give a safety net and even out people’s chances. Across rich countries, taxes and transfers reduce income inequality by about a quarter on average. It is contested because it involves real trade-offs and real differences in values. The evidence suggests the trade-offs are smaller than often claimed, but design matters enormously.

The Question

The Economic System explains how an economy produces and shares. This article asks: how do societies correct the way markets share income and wealth, and how far should they go?

Why Redistribution Exists

Markets are good at many things, but they don’t automatically produce fair outcomes. They reward people who already have capital, skills that happen to be in demand, or favourable circumstances. Redistribution:

• pays for public goods that benefit everyone, such as roads, schools and research;
• gives a safety net to people who fall on hard times;
• narrows the gap between those with the most and those with the least;
• evens out chances for people who started from very different places.

How It Works

• Taxes: the main tool. With progressive taxes, people who earn more pay a higher rate. There are taxes on income, wealth, inheritance, gains from selling assets, and on what we buy. Taxes on spending tend to weigh more on poorer households, who spend a larger part of what they earn.
• Social insurance: everyone pays in, and everyone can claim: unemployment insurance, public pensions, disability benefits, health insurance. It spreads risk across the whole population.
• Direct transfers: money or help in kind for particular groups, such as child benefits, housing support or food support.
• Public services: free or cheap education, health care and infrastructure redistribute quietly, because everyone gets something valuable whatever they can pay.

In rich countries, public social spending averages about a fifth of the economy.

The Debate

For more redistribution:

• it reduces poverty and inequality, with proven effect;
• it improves social mobility and equal opportunity;
• it reduces social conflict and builds trust;
• it corrects for starting points nobody chose.

For less redistribution:

• high taxes can weaken the incentive to work, invest and innovate;
• growth, not transfers, is the better way to lift people up;
• freedom includes keeping what you earn;
• badly designed systems can trap people rather than help them stand on their own.

What the Evidence Shows

• About a quarter: across OECD countries, taxes and transfers reduce income inequality by slightly more than a quarter on average, from about 40% in Ireland to around 5% in Chile. This effect has weakened since the mid-1990s, mainly because cash transfers became less generous.
• High redistribution, strong economies: the Nordic countries redistribute a lot and still score well on well-being, social mobility and competitiveness. The trade-offs seem easier to manage than often claimed.
• Design matters: benefits that are withdrawn sharply when people start earning can make work barely pay. How a system is built decides how efficient and fair it is.

Examples

• Universal child benefits: many European countries pay a benefit for every child, whatever the parents’ income, which reaches nearly everyone and carries no stigma.
• The 2020 pandemic: short-time work schemes in Germany, France and other countries paid most of the wages of millions of workers whose jobs were paused, and kept unemployment far lower than in previous crises.

The Human Side

A safety net is not only about money. Knowing you won’t fall into poverty if you lose your job or fall ill reduces fear, and lets people take risks: change jobs, start a business, care for a relative. Sharing also says something about belonging: that we are in this together. See human needs in the Personal Guide.

Open Questions

• How much inequality is acceptable, and who decides?
• Should redistribution focus on income, or also on wealth and inheritance?
• Should support target those most in need, or go to everyone, as with a universal allowance?

Where Next

• Previous: The Economic System
• Next: Democracy and Reliable Information
• Related: Universal Allowance, Inheritance, From Inherited Wealth to a Fair Start

Sources

• Orsetta Causa and Mikkel Hermansen, “Income redistribution through taxes and transfers across OECD countries”, OECD Economics Department Working Paper 1453 (2017), and VoxEU (2018)
• OECD, Social Expenditure Database (SOCX)
• OECD, Income Inequality: The Gap between Rich and Poor (2015)
• Raj Chetty and others, Opportunity Insights, on social mobility
• OECD, Job retention schemes during the COVID-19 lockdown and beyond (2020)