Question

This problem uses the analogy of a “leaky bucket” to explain one constraint on the redistribution of income.

a. What elements of the U.S. system for redistributing income create the leaks in the bucket? Be specific.

b. Between Republicans and Democrats, who do you think generally believes that the bucket used for redistributing income is leaky? How does that belief affect their views about the amount of income redistribution that the government should undertake?

Short answer

a. The regressive tax system in the U.S. is the dominant element that creates leakages in the income redistribution bucket, which widens the income gap in the economy.

b. The Republicans believe that the government is using a leaky bucket for income redistribution. It should consider shifting to a progressive tax system that will be more effective in reducing the income gap than the regressive tax regime.

Step-by-step solution

Explanation for part (a)

The leaky bucket analogy introduced by economist Arthur Okun explains that the income redistribution policy, which snatches the money from the rich and gives to the poor, is inappropriate for the government. It brings inefficiency to the economy.

The income taken from the rich through taxation is not fully transferred to the poor but is lost in the taxation and transfer costs. Also, the transfer of income reduces the incentive for working for the rich and poor. As their income increases, the transfer of payments to the poor are reduced, and marginal tax rates snatch a more significant proportion of income from the upper-income group.

The U.S. system involves a leaky income redistribution policy. The U.S. system applies a regressive tax system. It snatches the income from the poor, transfers to the richest group, and maintains its funds. It makes the poor poorer, and the rich become more affluent, widening the income gap.

Explanation for part (b)

The Democrats prefer a regressive tax system saying that it covers the loophole of the tax system. On the other hand, the Republicans stand for a fair taxation policy from an individual perspective. It says that the country should adopt a progressive tax system to pay a fair proportion of an individual’s income to the government. Hence, the Republicans believe that the bucket of income redistribution is leaky.

This perspective of the Republicans supports the argument that the size of taxes for government funding should be according to the income of the individuals. It will boost more income equality in the economy as both the richest and poorest will contribute an equal proportion of income to the government funding.