Incentives and Income Equality
What is the Tradeoff between Incentives and Income Equality?
Written by Jason Gordon
Updated at March 17th, 2023
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What is the Tradeoff between Incentives and Income Equality?
Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure incentives for economic output. The poverty trap, for example, defines a situation where guaranteeing a certain level of income can eliminate or reduce the incentive to work. An extremely high degree of redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship. Thus, it is common to draw the tradeoff between economic output and equality.
In this formulation, if society wishes a high level of economic output, it must also accept a high degree of inequality. Conversely, if society wants a high level of equality it must accept a lower level of economic output because of reduced incentives for production.