State regulation of income distribution

The formation of total incomes of the population covers their production, distribution, redistribution and use. The distribution of income is formed at the stage of formation of income of the owners of production factors (functional distribution). The personal distribution of nominal income is the result of redistribution. Passing through the family budget, the amount of per capita income varies depending on the size and structure of families, the ratio of dependents and persons with independent incomes. The value of real incomes depends on the parameters of the inflationary process. The main means of redistribution of income is the state regulation of this process. Tax systems and state transfers (monetary and in kind), social security and insurance systems, etc. show that the modern state is involved in large-scale income redistribution activities.

Any of the forms of state regulation (including social) consists of material, institutional and conceptual components. Note that social regulation is not an exclusive privilege of the state, it covers not only the redistribution of income, but also other indicators of the standard of living. The objects of social regulation are environmental protection and consumer protection. Social regulation is carried out by business entities, trade unions and other non-governmental organizations.

The material basis of state regulation depends on the volume of national production and its share, which is redistributed centrally, through the state budget. The institutional framework is linked to the organization of the redistribution process and the activities of the relevant institutions (including non-governmental ones). The conceptual basis of state regulation is a theory or government doctrine that is the basis of the social policy of the state.

Alternative conceptual approaches to state redistribution of income can be reduced to the problem of contrasting equality and efficiency. The origins of this problem lie in the area of resource allocation. Classical theory holds that the market is able to rationally allocate limited resources. In accordance with the so-called “Pareto efficiency”, the state of the system is stable if no redistribution of resources (or products) can improve the situation of one of the participants in the economic process without worsening the situation of others. At the same time, the distribution of income is characterized as consistently uneven. Classical theory holds that the distribution of income is immutable and that any state redistribution is doomed in advance. The neoclassical trend critically assesses the uneven distribution of income. Attempts are being made to find an efficiency criterion that would compare the processes that affect the incomes of many consumers at once. From this point of view, income redistribution can be considered effective, in which the increase in the wealth of the winners is greater than the loss of wealth of the losers.

Proponents of government income redistribution argue that equality in income distribution is a necessary condition for maximizing the overall utility of income for all consumers. This conclusion is quite reliable in conditions when the volume of all redistributed income is fixed. Critics of state redistribution rightly believe that the stimulus effect is associated not only with the magnitude, but also with the way income is distributed. Therefore, any redistribution of income aimed at maximizing total utility in the current period inevitably leads to a decrease in income (and total utility) in the future.

The effect of income redistribution is ambiguously assessed by both supporters and opponents of state intervention in this process. According to A. Oaken’s calculations, leakage through the “thin bucket of redistribution holes” accounts for more than 70% of income. These “holes” are inevitable in any redistribution and arise due to the undermining of incentives for business activity (both labor and entrepreneurial), the growth of administrative costs for the implementation of income maintenance programs. As a result, any redistribution of national income into more equal shares leads to a decrease in its total value. As a result, the dynamics of income depends both on the growth of the social product and on the ways of its distribution. Both the growth and fall of incomes can be accompanied by both an increase and a decrease in their differentiation. Real redistribution is carried out spontaneously and can acquire a hidden, uncontrollable character. As a result, the declared social priorities put forward by political leaders turn out to be quite far from the results of government programs. Ultimately, the distribution of income is determined not by politics, but by economic laws. Policies should only neutralize barriers to increasing socio-economic mobility in society and provide clear guidelines for identifying socially significant types of behavior. In modern conditions, there is a process of changing the systems of preferences and criteria for maximizing utility. Such universal human values as environmental protection, health promotion and the development of creative potential, political and social stability of individual countries and human civilization as a whole are becoming increasingly important.

Alternative conceptual approaches to state redistribution of income can be reduced to the problem of contrasting equality and efficiency. It is known that the market system, among its other “mistakes”, contains errors in the distribution of income. The distribution of income, as we have seen, is uneven. The market system does not ensure the realization of the right to work, education, medical care, etc., ultimately does not contain guarantees of social justice and equality. The complexity of the problem lies in the fact that concepts such as fairness and equality are associated with value judgments that are based on different preferences, tastes and views. Value judgments are associated with philosophical, ethical categories outside of economics, but this does not mean that economic analysis cannot contribute to the study of these phenomena, that economic theory cannot go beyond explaining the consequences and calculating the benefits and costs of various options for solving the question of the relationship between equality and efficiency.

Economic analysis is an information base for making decisions about social policy priorities. The universal content of the concepts of equality and justice is an eternal, ahistorical problem of all worldview systems. At the same time, the categories of equality and justice have a specific historical content, since the implementation of theoretical concepts is carried out by well-defined governments and political organizations in the current economic and political conditions. Equality and justice, basically ethical, socio-psychological categories, have an objective, economic content. From the point of view of economics, the criteria of equality are rightly related to the correspondence of economic relations to the sources and goals of economic growth in the specific historical conditions of national models of the economy.

The relationship between equality and efficiency in practice is reduced to the search for such forms and methods of redistribution that would minimize the negative impact of distribution processes on efficiency, while maximizing the positive result in the form of poverty reduction.

The choice of the conceptual framework for social policy depends on the political process. However, if the market is not able to “correctly” distribute revenues, this does not give reason to believe that the political process is able to find an optimal solution.

State redistribution of income is carried out through budgetary and financial regulation. The state, in accordance with the priorities of social policy and the existing special social programs, provides social payments in the form of cash and in-kind transfers, as well as services. Social payments and services are diverse. They are differentiated by the sources of formation and methods of financing, the conditions for providing them to a circle of recipients. Cash social payments are associated with compensation for loss (decrease) of income as a result of: complete or partial disability, birth of children, loss of breadwinners or work (unemployment benefits, compensation for retraining costs and other payments to the unemployed). Cash social payments are supplemented in whole or in part by free services in the health, education, housing and transport sectors. All social transfers may be of a lump sum nature or paid periodically for a set time. The amount of social payments may depend on the legally established minimum per capita income or wage. Social transfers can take the form of tax rebates. All social payments are made to the system of social insurance and social security, supplemented by state charity.

In countries with market economies, financing of these areas is carried out on a tripartite basis (the state, employers and recipients of funds), and in countries with a planned and administrative economy – centrally. In the planned economy, real incomes of the population were formed mainly at the expense of wages and incomes from public consumption funds (OFP). The distribution of GPF was carried out on a free or partially paid basis in accordance with the quantity and quality of labor contribution to social production, as well as taking into account need.

Various options for combining public and private branches of social payments are known. The purpose of social policy is to encourage all forms of business activity, primarily labor and entrepreneurial. Labor activity is manifested in an increase in the degree of use of labor reserves, an increase in employment and labor productivity; entrepreneurial – reflected by the volume and structure of investments. Being objectively interrelated, these forms of activity are carried out at any given moment by different subjects who have different motivational models of behavior. As a result, the system of state regulation should simultaneously support revenues and create incentives to increase the business activity of all market entities.

In the transition period, the policy of income regulation has its own specifics:

The 1st feature is that in the transition period there is a certain destruction of the previously functioning income system and the formation of a new structure of incomes of the population (Fig. 10.5.).

This is manifested in the spread of new forms of income:

income from shares and other securities; interest income from foreign currency deposits; rental income; rental income; income of the shadow business; income from business activities.

A distinctive feature of the transition period is that the share of income received in the shadow economy at certain stages of development increases to 50-60%.

The 2nd feature of the transition period is to reduce the share of social transfer revenues.

The 3rd feature is manifested in the increasing concentration of income in a small part of society.

The 4th feature is that in the transition period there is a drop in the share of wages in the total monetary income of the population and a sharp decrease in its stimulating value. This leads to a loss of material interest in increasing labor activity and its results. It is clear that such a situation should trigger special public policy measures.

The 5th feature is the growing increase in the share of the population with incomes below the poverty line, which requires urgent and significant measures of the state for their social protection. Poverty can be overcome only if able-bodied citizens earn enough. For them, the objective of social policy should be to enable them to improve their well-being through their work, self-employment, initiative and entrepreneurship. Measures are needed to stimulate investment for domestic producers in order to create new jobs.

Incomes of the population

Main forms of income

in transition economy

Main sources of income

Wages and incentives

Economic activity within the framework of laws

Economic activity in a non-legal framework (shadow)

Property income

State transfer payments

Entrepreneurial income

Other income

(interest on deposits, lottery winnings, etc.)

An important feature of the policy of income distribution in transitional conditions should be the transition to a system of social partnership.

Social partnership is a system and mechanism for regulating contradictions between social groups in terms of income redistribution, based on the principles of partnership and compromise. This system was born as a long-awaited reaction to strikes, strikes, etc. that shook the market economies of different countries  for a long time By the middle of the twentieth century, the principle of social partnership had gained international recognition and was enshrined in the Convention of the International Labor Organization (ILO).

Social partnership has three levels of its implementation: national, sectoral and primary (enterprises). At each level, the negotiation and contractual process is completed in the form of an Agreement (general, sectoral, collective). With skillful organization and observance of the relevant principles, the system of social partnership, as international experience has shown, gives a significant positive effect, which is especially important for the transition economy.