The Dark Sides of Wealth Redistribution: A Caution

An evenly divided financial pie mosaic.

By Nate Kloepfer

We all have a desire to help our neighbor, but are wealth redistribution welfare policies the right way to do it?

In many countries today, prosperity and wealth have reached unprecedented levels. However, there are still many who have not reaped the benefits of our modern-day levels of prosperity. Many are still struggling each day to make ends meet and to survive. A large question arises: why are there still poor individuals in this age of wealth and prosperity?

It is a good and natural feeling to want to help those who are economically less fortunate. These are the emotions that motivate some to propose and implement government intervention in the economy, such as progressive tax rates and generous welfare benefits. But do these policies fix the wealth disparity in the nation, or are they just a quick fix with long-term negative consequences?

Here lies the tension between the ideologies of laissez-faire economics and interventionist economics that can be traced back to the 19th century. Unlike leading to the prosperity of all, the wealth redistribution policies of progressive taxation and large government benefits lead to economic stagnation and collapse.

Video: Negative Consequences of Wealth Redistribution in Sweden

Greece: A Case Study

Many countries experienced economic hardship during the Great Recession in 2008-2009, and Greece was no exception. However, Greece suffered from a high level of debt and government spending, and a low level of government revenue. When investors stopped buying Greek bonds due to that nation’s astronomical debt levels, the Greek government’s level of spending could not continue.

In an attempt to restore balance to the budget, Greek officials slashed government spending on welfare programs and on other areas, whilst raising taxes. These “austerity” measures were highly unpopular with the Greek public, who did not want their government benefits to dry up. The economy and the Greek public had become addicted to government spending as a means of growth and prosperity, but ultimately the government spending was unsustainable.

The main result of the Greek debt time bomb was 63 straight months of economic contraction and very high unemployment rates during that time. Had the Greek government practiced better fiscal responsibility in the years leading up to the Great Recession, their people would not have suffered from a severe economic collapse.

In Greece’s case, their high levels of spending on wealth-redistributing welfare programs contributed to their unmanageable high debt levels, which then ultimately caused their economy to catastrophically implode.

As citizens of the United States of America, let us learn from Greece’s financial troubles, and let us avoid the pitfalls of spending vast amounts of money on wealth redistribution programs. Let us not have 5 years of economic contraction, and take down the rest of the world as a result. Let us practice fiscal responsibility to preserve the well-being of our people and our status as a beacon of freedom to the world. Let us preserve the free enterprise and vibrancy of the United States of America that means so much to me and to millions of others.

A very high tax on a receipt.

A Look at Incentives

Progressive tax rates may appear to be a good solution to pay for welfare programs to assist the needy. However, progressive tax rates have many unintended consequences that come from incentives. Does a progressive tax rate make it more or less attractive for an entrepreneur to increase their income? What does a wealthy individual do when they experience a tax hike?

A progressive tax rate is an incentive for individuals to make less money, usually by producing less. Why would an individual work more and increase their income just to enter a higher tax bracket and get taxed more?

Progressive tax rates usually aim to increase revenue, but this does not always happen. Why? Because the wealthy in such a jurisdiction may simply get sick of it and move out instead of paying up. High tax rates and progressive tax rates induce powerful incentives for the wealthy to move away, taking their contributions to the local economy with them.

Welfare programs provide much assistance to the disabled in this nation. But some welfare programs also provide incentives for individuals not to work. Why would an able individual toil at a job if they can live a comfortable life on a government check? The result of welfare checks is a less productive populace and a greater tax burden on those who are working and making money.

As taxes rise more and more to support ballooning welfare systems, the incentives to not work grow larger and larger, again resulting in a decline of national productivity. National productivity is intimately related to the nation’s Gross Domestic Product (GDP), and when national productivity declines, so does our GDP and therefore our standard of living.

An example of high taxation leading to lower productivity is the communal farms of the Soviet Union in the 1930s. A communal farm is where all of a farmer's harvest gets taxed by going to the collective, and then the farmer receives their proportion of the collective harvest. In his work The Gulag Archipelago, Aleksandr Solzhenitsyn describes what happened to one particular communal farm, or kolkhoz: "Just then the kolkhoz system in the village of Kishkino was going to pieces fast. Nobody had any faith in it or wanted to work, half the peasants had left". The peasants did not want to work the communal farm because they did not have faith that their efforts would be compensated by a share of the collective effort, and they did not have the faith that their fellow farmers would put in the effort to contribute to their own share of the harvest.

Some Alternatives to Wealth Redistribution

An effective alternative to a progressive tax rate is a flat tax rate, such that regardless of personal income, one pays the exact same tax rate. For those with incomes below the federal poverty line, there will be no tax rate. There will be minimal loopholes in this new tax code, to promote greater equity in the flat tax across the board. 

As an addition to this flat tax, there could be exemptions claimed for charity, with the exemption amounts exactly equaling what was given in charity. These exemptions would be limited to 10% of the total tax paid. This would provide an incentive for wealthy individuals to put their wealth towards a charity of choice, instead of having Uncle Sam take the bag.

Sources: 

• "Greek government austerity measures" BBC News, BBC News, 19 Oct. 2011
• Solzheniëtìsyn Aleksandr Isaevich. The Gulag Archipelago: 1918-1956: an Experiment in Literary Investigation. III, Harper & Row, 1975.

Image Credits (Including Speech Slide Images):

• "Mosaic" by mag3737 is licensed under CC BY-NC-SA 2.0 
• "Amazing Tax" by jasmeet is licensed under CC BY-NC-ND 2.0 
• "Dollars down the Drain" by Images_of_Money is licensed under CC BY 2.0 
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• "Day 5 - 1/5/12: Is it OCD..." by IslesPunkFan is licensed under CC BY-NC 2.0