Register for Client Education Seminar. Learn More »

Effects of Income Redistribution

by AOG Wealth Management

President Obama’s latest income tax plans have been raising a few eyebrows. Some people ask if redistributing income this way will really help the economy. This debate on the effect of redistribution on equality has been going on in the economic community for a while. The relationship between these two ideas, unfortunately, is not that simple.

Investment Distribution

This new income tax package can change the face of the age-old “redistribution versus equality” discussion. It can also affect your investments down the line. If you’re planning to invest, first discuss the issue with your financial planner in Northern Virginia. It pays to know the basic arguments:

Inequality causes slow growth—that’s why we need redistribution.

On one hand, some economists insist that redistribution is the proper solution to poverty. To shrink the growing gap between the rich and the poor, why not redistribute income? On the surface, the plan seems sound.

Suppose there are 10 people living on an island. Among them, one is extremely able (i.e., “Able Abel”), the other eight are partially able, and the last one is extremely unable (i.e., “Hapless Harry”). In the redistribution scenario, Abel could be working to feed everyone on the island.

Redistribution by its very nature causes inequality.

Some economists believe that redistributing Abel’s income is counterproductive. It actually adds a new dimension to the inequality already present on the island from the start (those who can work versus those who cannot, those who can work extremely well and those who are only average). Some analysts fear that this can lead to drastic unemployment.

Historically speaking, the bigger the government has grown, the slower the economic growth, especially when redistribution policies became more prominent. Around the time of the 2008 economic crisis, for example, where inequality and unemployment values were highest, redistribution rates were higher as well.

Redistribution can alleviate inequality—up to a point.

There are analysts and financial advisors in Northern Virginia and the rest of the country who hold a less-extreme opinion on the debate. After all, the island analogy is heavily simplified. While it helps us make sense of daunting concepts, like all other analogies, it’s not always accurate when applied to actual situations.

In reality, perfect equality and perfect income efficiency cannot exist at the same time. Redistributing income will help bridge the inequality gap, but only up to certain point. Beyond that, you lower the incentive for both business and innovation. If you take away favorable financial rewards, fewer individuals and companies would go into business or invest in technology. At worst, the economy could come to a standstill when investments stop coming in.

AOG Wealth Management excels in handling your investments amid changing economic policies. Whether the new tax package will continue to raise questions, we can have your financial resources backed up by an efficient plan. Contact us at (866) 993-0203 to start preparing your financial future today.

Category: Financial Advisor