Income Redistribution

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

The government performs five major functions that affect the allocation of resources and the distribution of goods and services.  These functions include administering the legal system, regulating market activities, providing public goods and services, redistributing income, and stabilizing the economy.

The redistribution of income through expenditure and tax policy is based upon an equity argument that greater equality of wealth and income is beneficial to society.  Income is redistributed by the government either through in-kind transfers or by direct cash payments.  Cash payments are provided to individuals through social insurance programs.  These payments are based either on the amount of one's contributions to the programs or on one's need.  For example, Social Security, which accounts for over 20% of all federal government expenditures, and unemployment compensation payments are related to the recipients' prior contributions to these programs.  Other cash payment programs, such as aid to families with dependent children, supplemental security income, and earned income tax credits also use individuals' earned income as the payment criterion.

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