Public Finance - Distribution of Income - Essay Example

Student’s Name Professor’s Name Course Name Date Public Finance: Distribution of Income Summary of the Paper This paper has embarked on expounding the notion behind the distribution of income as a way of enhancing public spending activities. Some of the notable facets discussed in the paper include the historical development of the world distribution of income where statistical data in the United States of America has been used to further cement the analysis. The causes of inequalities of income distribution are also identified as; trade and technology, family structures and also, the aspect of immigration. The paper further expounds on income distribution within socialists economies as a sub-topic within the entire distribution of income topic analysis. Under this section, the paper argues that such facets as education, training and skills are some of the notable facets that are needed for the purpose of ensuring that households are able to access earnings equitably as a form of human capital investment. In the final section, the paper gives an account of the numerous benefits of the topic; distribution of income to the overall public finance structures where such benefits as adding with the formulation of policies, its fundamental role in politics as well as provision of information related to wage discrepancies needed for formulating effective wage policies are discussed. Historical Development of World Distribution of Income The global distribution of income has been an ongoing aspect for both economists and scholars the world over. Some of the present convergence literary works have been able to ascertain to the fact that there has been significant levels of divergence of the distribution in two folds that include; first, the level of growth and development for poor countries across the globe have been lower in comparison to the growth rates of their immediate rich counterparts at any given moment (Barro and Xavier 56-66). Second, there has been a significant increase in the level of discrepancies of income per capita across the different countries over a short period of time. The notion of income distribution is considered to be a statistical concept given that no single individual is mandated with the task of distributing income (Barro and Xavier 66). It mainly arises from individual’s perception and decision about the idea of employment, savings and investment as they engage in market interaction that are greatly affected by the already established tax systems. For instance, in the period between 1990 and 2000, there was an increasing aspect of employment that facilitated the alterations of income distribution. This notion can be further argued as follows; first, the present distribution of pre-taxed income within the United States of America is impeccably unequal. Statistically, 10 per cent of the US households that enjoyed an average income of about $200,000 accessed about 42 per cent of all the pre-taxed income in the late 1990’s (Afonso, Schuknecht and Tanzi 329-337). Consequently, a top 1 per cent of the aforementioned households that averaged about $800,000 of money income accessed about 15 per cent of all the pre-taxed money income. Second, in the long run, the channel of income inequality for the period going over the 20th century is exhibited by largely two more aspects; a significant fall in income inequality in the period within the World War II and another extension of the inequality that was initiated within the mid-1970’s that further took stride in the 1980’s (Afonso, Schuknecht and Tanzi 344-346). This further proves the notion that the income inequality that is being witnessed today is as significant as one that was witnessed within the 1920’s. There are numerous aspects that have, over a long period of time, been associated with distribution of income discrepancies that include; first, family structures were altered over short period of time so that one-earner families were replaced with either low-income single-parent families or two-earner high-income families for that matter (Chen, Shaoua and Martin 149-166). Second, there is the element of trade and technology that altered the position of demand away from the less-skilled and poorly educated workers towards laborers with high sets of skills and education background. Other factors that contributed to the income distribution discrepancies over time include; the aspect of immigration and the ever-increasing activities attributed to markets expansions that showcased characteristics of well-formulated communication and transportation platforms (Chen, Shaoua and Martin 168-170). The fundamental purpose of this paper rests with the evaluation of the immediate effects of distribution of income towards a country’s economic growth and thereby showcases the notion relating to distribution of income in socialist countries. Topic Analysis: Income Distribution in Socialist Countries In regards to labor income in both market and socialists economies, it is established that the notion of earnings distribution depicts the entire distribution processes. Consequently, distribution of income is largely dependent on the variations that exist in both work and hourly rates (Deaton 7-9). Most significantly, the pay variations present n market economies are used to depict the differentials that are reflected in the education, training and skills levels of an individual worker. The aforementioned elements are the most significant elements of human capital. For instance, the true worth of a given set of skill is always determined by the interactions that are offset by both supply and demand. Possible alterations in education systems and the immediate access to capital to fund activities associated with training will likely affect the element of effective supply of the sophisticated skills (Deaton 11). Moving forward, under these economies, the accumulation of both real and financial assets will likely affect the level of wealth distribution. The element of investing in human capital, in an idealized model, is likely driven by trainees that have immediate access to perfect information as well as readily-available supply of finances that are obtainable on the security of a fundamental human capital being acquired (Deaton 12-14). This, in turn, has the effect of allowing returns to human capital to be equalized with ones present within forms. This, under the market economies, will only be met in the event that there are higher personal debt ratios or in cases where equity-type claims on human capital element can be sold for that matter. In the event that the aforementioned conditions are met, intervention is considered a necessary process for accessing the perfect education and training programs to the right workers. In most of the socialists countries like Russia, a formal structure for payment of income was present across all of the industries in operations with a higher income being rewarded to workers involved in muscle power duties like mining or heavy engineering and a subsequent lower rate of rewards for activities that involved lower muscle power like medicine and education operations; which required little or physical capabilities and also employed mostly women (Deaton 16-19). A notable feature that could be perceived in these economies rested with the degree of centralized wage formulation, which allowed workers a freedom to choose the form of work they would engage in (Flemming & Mickelwright 33). It is further established that the pay differentials, as a way of income distribution, was embarked on for purposes allowing incentives to investing variations of human capital so that they could be attracted to professions with uncertain and unpleasant conditions. These incentives were meant to impact an element of responsibility, working hard and also, for purposes of shifting industries in areas chosen for purposes of expanding levels of employments. Following this line of reasoning, it can be fairly established that any given level of income inequalities must always take into consideration the fact that it occurs as a result of a higher incidence of unemployment (Flemming & Mickelwright 37-45). For instance, the immediate contribution of open unemployment to the element of income inequality may be associated with a decline in reported levels of inequality of earnings amongst those employed. On the other hand, in such other areas as Central Europe, the activity of engaging in the introduction and expansion of market forces has, over a substantial period, catapulted the inequality of income given that incentive mechanisms are operating under lower supply of skilled personnel (Flemming & Mickelwright 66-75). Subsequently, in both market and planned forms of economies, the elements of taxes, subsidies and income transfers can only be expounded with a distinction that should be made between the distribution of original income with net income, expenditures or consumption rates. It is argued that the fundamental facet that socialist economies, in the course of executing income distribution processes, must take into consideration the effects of prices and wages controls that might affect the level of personal income taxes to remain redundant for that matter (Flemming & Mickelwright 77-79). Thus, in socialist economies, the notion behind original income is perceived as having been influenced by the element of policies in the course of net income distribution. Socialism can also be perceived as being identical to private wealth holding as well as the passage of the inheritance through a significant level of generations. Notably, inheritance is a significant element of income distribution since it influences it in numerous ways (Kelly 86). For instance, it is notably clear that inheritance is a significant source of property income that can be, in turn used to purchase human capital for subsequent generations since parental influences can likely affect children’s ability to access earning opportunities. Some of other notable elements that have been used over a long period of time to expound on the variances that exists in income distribution within the socialist economies are the immediate increase or decrease of income allowed to individual households across the economy system. In socialist economy, households are marred with relatively lower levels of investment income, unemployment rates and a higher labor force participation that triggered an increase in the measure of degree dispersion. Therefore, households are a significant playing factor in determining the overall income distribution that is resulted from the individual household earning capacities. Unlike in a capitalist economy, in a socialist economy, the level of unemployment is low given that the entire labor participation is willing and able to secure a job that is needed for purposes of wealth accumulation. This wealth accumulation is later used as a source of wealth that is passed to significant other generations as inheritance hence ensuring that the economy cycle is ensued and sustained for a longer period of time. Importance of Income Distribution The aspect of distribution of income is considered to be a fundamental topical analysis within the public finance discipline as a whole due to a myriad of reasons. First, it allows policymakers to formulate effective policies that will be able to sustain and maintain a great number of projects within any given economy regardless of whether they fall under the market and planned economies brackets (Rosen and Gayer 89). It should be noted that the notion behind distribution of income rests with the ability and willingness of the different household to participate in labor for purposes of catapulting earning capacities. Second, income distribution allows economists and other scholars to find solutions to the different demographic issues that are brought forth as a result of the alterations made in prices and wages of subjects within any given economy. The acquisition of this knowledge is further needed for purposes of conducting improvement programs aimed at enhancing the level of income (Rosen and Gayer 68-77). Third, the aspect can highly enhance research on wage inequalities so that formulation policies are directed towards ensuring that economies are fairly positioned in respect to such other external influences like inflation rates and higher unemployment levels (Stiglitz 111). It is quite visible that the capacity of households to enjoy a greater level of earnings is highly dependent on such other facets as the capability of the economy to support its income distribution activities regardless of the ever-changing economic environment. Fourth, an effective grasp of the knowledge related to distribution of income plays well to influences the activities of politics at any given moment in time (Bartels 233-256). For instance, possible inequalities in such aspects as land and also income ownership will likely affect economic growth of a given country. Thus, voters are expected to internalize on the abilities of a politics to aid with the redistribution of productive resources to an economy before exercising the voting rights in favor of certain political aspirants. Works Cited Afonso, A.; Schuknecht, L. and Tanzi, V. “Public Sector Efficiency: An International Comparison,” Public Choice, 123 (3-4), (2005), 321-347 Bartels, L. M. Unequal democracy: The political economy of the new gilded age. Princeton, NJ: Princeton University Press. 2008 Barro Robert J. and Xavier Sala-i-Martin, Economic Growth, 2nd ed. MIT Press, (Cambridge, MA, 2003). Chen, Shaoua and Martin Ravallion, “How did the World’s Poorest Fare since the early1980s?” The World Bank’s Research Observer, vol. 19(2), (2004), 141-170. Deaton, Angus “’Measuring Poverty in a Growing World’ (or ‘Measuring Growth in a Poor World’),” The Review of Economics and Statistics, 87(1), (2005), 1-19. Flemming, John & Mickelwright, John. Income distribution, economic systems and transition. Innocenti Occasional Papers: Economic and Social Policy Series no.70. Wadham College, Oxford.1999.pp.1-99. Kelly, N.J. The Politics of Income Inequality in the United States. New York: Cambridge University Press. 2009. Rosen, Harvey S. and Gayer, Ted. Public Finance. Ninth Edition. New York: McGraw-Hill Irwin, 2010 (PF) Stiglitz, Joseph E. The Price of Inequality. New York: W.W.Norton.2012 Sala-i-Martin, Xavier, “The World Distribution of Income Estimated from Log-Normal Country Distributions,” mimeo Columbia University, 2004. Read More