Redistribution of Wealth Details

In a perfect world where the wealth of all 7.7 billion people on earth is perfectly equal, every person would get $41.169 no matter how old or young the person is. Unfortunately, we don’t live in a perfect world. Currently, the bottom 70% poorest people hold only 3% of the world’s total wealth, while the top 1% wealthiest people hold around 50% of the world’s total wealth. Jeff Bezos' wealth is more than Indonesia's entire GDP, an archipelago country with a population of 271 million people.

The rapid pace of globalization and technological advancement brings radical changes to our lives. Private jets allow people to fly cross-continent in mere hours; the internet allows people to talk to other people across the world instantly; digitalization in trading enables people to update stock prices in seconds. The rich get even richer faster, while the poor get richer at a significantly slower rate. It is the main reason for wealth inequality.

The main idea behind wealth redistribution is to transfer money from the rich to the poor. It can be done in so many different ways. The most popular method is through taxation. Rich people get taxed much more than the poor, and then the government uses that extra tax money to give economic incentives to the poor.

However, it’s not as easy as it seems. The government often mishandles the execution. They could raise the tax too high, they could offer the money to the wrong people (rich people disguised as the poor), or when they do give the money to the poor, it is sent back directly to the rich via mortgages, bills, debts, etc.

Another popular method is to raise the minimum wage in a specific area. It ensures the lowest earners are getting a decent standard of living. Currently, minimum wages are rising slowly each year.

It is a good trend, but sometimes the minimum wage raise is not significant enough to produce a meaningful impact. Because of other facets of living such as rent, food, internet, prices are increasing faster than the minimum wage. Furthermore, if the minimum wage is raised too high or too fast, companies could fail to cope with the increased price of labor and will be forced to flee the country.

Real-World Example of Redistribution of Wealth

The United States of America’s Internal Revenue Service (IRS) enacted a taxing model that's proportional to an individual’s wealth to help redistribute wealth better. The bottom-income tier which consists of 50% total population contributes to 3% of total taxable income. The middle-income tier contributes to 27% of total taxable income. Meanwhile, the top-income tier which consists of 10% of the total population contributes to a whopping 70% of total taxable income.

The rich get taxed more so they don’t get richer too quickly. Meanwhile, the government collects those taxes and spends the money back to the poor by giving financial incentives. Recently, the USA government planned a COVID-19 stimulus package aimed at the middle-lower class. The economic stimulus adds up to $1.9 trillion, which means each individual will get up to $1400. Hopefully, this financial aid will help middle to low-income citizens rebuild their finances after the COVID-19 economic downturn.

Norway is a country with the most equally distributed wealth in the entire world. In Norway, the 1% richest only has 21% of the combined wealth. An example of their effort to keep their wealth distribution in check is properly managing minimum wage. In 2018, Norway workers' minimum wage was 44200 Krone/month ($5240/month). In 2019, that figure rose to 45500 Krone/month ($5400/month). In 2020, the number grew further to 47000 Krone/month ($5575/month).

History of Redistribution of Wealth

In the early 19th century, people lived simpler lives. Most of the jobs are low-skilled jobs such as printing, manufacturing, and farming work. The invention of the steam engine marks the start of the industrial revolution. This is where things get rolling.

Jobs multiply and diversify very fast. New jobs with high skills involving complex motor functions or complicated decision-making. Suddenly the current population splits in two. Those who learn faster and perform better get a better job, therefore amass more wealth. Those who work the same simple job have stagnant wealth.

The introduction of the internet makes the economy flourish. Intelligent people who perform better get recognized more, which opens up more opportunities to improve their salary. The same goes for companies; they have a better way to reach and provide their customers through the internet and technological advancement. Wealth grew exponentially, rich people get richer faster, while poor people are stagnant.

According to data from the US Census Bureau, in 1970, the bottom 80% poorest owns 57.7% of the total wealth, while the top 20% richest owns 43.3% of the total wealth. In 2010, the bottom 80% poorest owned 49.7% of the total wealth, while the top 20% richest owned 50.3% of the total wealth.

Significance of Redistribution of Wealth

Wealth inequality in an economy makes it easier for rich people to control and run over poor people. Even worse, a particular rich company could buy up the entire market and create a monopoly. A monopoly restricts economic growth and kills technological inventions. There is no winner in a monopoly. It is why the redistribution of wealth is so important.

However, there is one effect hiding in plain sight, one so simple and deep-rooted within the human psyche: the motivation to earn a better life. Wealth inequality creates a model to follow. Being a rich person will be the dream of every poor person. That dream will drive people to learn faster and work harder. Eventually, they will reach a higher standard of life and amass more wealth than before, thanks to sheer will and motivation.