Income distribution is an economic term referring to the distribution of income within a nation's population. How that income is distributed is at the heart of the issue, and has both economic and political ramifications. Income distribution is referred to as both an economic theory and an economic policy.
The issue at stake is an economically and politically charged one, with questions as to how the government can best redistribute income from those with greater income capacity to those with less.
The notion of income distribution is more a statistical concept than the actual transferring of money from one person to another. In modern-day terms the concept of income distribution relates to how people make decisions regarding the type of work they do, and how they save or invest their money. Taxes affect aspects of income distribution as does market interaction in business.
Modern-day economists look particularly at individuals and households and the employment and financial decisions they make. Today, in the current climate, income inequality is a term synonymous with income distribution. Economic growth is also closely aligned to factors such as income inequality and income distribution.
Studies regarding income distribution in the United States and how trends have changed over the years have revealed a number of key issues. As a result of statistics measured, it appears that in the United States there is an extremely unequal distribution of pretax income. Reports have shown that in the top 10 percent of households, where the income was approximately $200,000 per annum, an amount of 42 percent of pretax income was received. In the top one percent, where average incomes peaked at $800,000 a 15 percent figure of pretax income was received.
At the time of World War II, inequality levels fell, and inequality was not as great as it had been before. The inequality became more pronounced again from the mid 1970s, accelerating further into the 1980s. The situation is now estimated at being comparable to the level of inequality related to income as in the 1920s.
Another factor in the inequality stakes presupposes the fluctuation in family income over a period of time. The distribution of income over a number of years appears to be more equal than if it is assessed over one year.
David Ricardo presented his theories of income distribution as early as 1817. His "theory of rent" is one that economists today still refer to. Ricardo's theory deals with the idea of distribution as it relates to property. When he was theorizing, the context was one in which the dominant economic market revolved around rent. Wealthy landowners received money for farm rent. The idea of income distribution was explained by Ricardo as rent being the distribution of proceeds from a certain scarce resource. An abundance of land opens up the possibility of no rent being paid, with farmers able to move freely to settle on free land of their choice. The income from the farm yieldings is received solely by those involved with the production. Income from the supply of production goods is not included in rent, albeit that some financial benefits accrue. Ricardo's theories of rent include the scarcity or abundance of land and how this affects income distribution. Where there is an unequal distribution of property, likewise there is an unequal distribution of income. Thus distribution of income in these instances encompasses the relationship between land and who owns it, the people working the land and capital gained. Karl Marx took the idea of rent theory into a more extreme form of the theory of monopoly rent and general distribution.
Discussions regarding enhanced economic growth are associated with the notion of a more equal distribution of income. Recently there has been a marked difference in income potential as seen in different countries and across classes and groups. Strategies have been suggested by economists, with various methods proposed to apply income distribution. The reallocation of resources in order to raise income is one idea. The concept of capital accumulation also comes into play. Moreover, considerations such as savings and investments form part of the growth and distribution equation.
Inequality appears at the heart of the income distribution debate. Distribution by its nature contains an aspect of inequality, and thus there is a certain ambiguity as to when it is positive or negative. Income distribution may focus on individuals or systems. On a basic level, regarding individuals, people receive income at either end of the economic scale. Systemically, changes in the social system have an effect on the economic status quo. Questions arise regarding the balance of distribution and how that can be effected, as well as the notion of economic expansion and its interrelationship to income distribution.