Center for Liberal Leadership

Beyond ethical concerns, there are two arguments frequently employed to contend against “too much” redistribution of income. The first argument is that redistribution distorts incentives and thus carries a severe loss in efficiency. For example, when a government levies taxes on incomes, people have incentives to make a lower effort (since they will not be able to receive the entire product of their work).

The second argument is that monetary income (consumption) is a poor proxy for actual welfare. Consider the following example: an undergraduate student in economics can pursue a career in finance with a high profile of future incomes, or he can pursue an (equally effort-demanding) academic career, with noticeably lower incomes. Usually the decision is not easy, what might indicate that, in spite of the differences in incomes, the well-being under both activities is pretty much the same. The parity in well being is partially explained by the consumption of some goods and services (in a wide sense) “purchased” by a cut in salary (e.g. time flexibility, lack of stress, taste for that particular job, etc.). Since the consumption of those (costly) goods and services is not measured in the surveys, a comparison of the incomes (or even the expenditures) of individuals in both situations would be simply erroneous.  Read More…