Redistribution toward Low Incomes in Richer Countries

During the twentieth century, most developed countries have adopted extensive government-managed income support programs for low-income families and individuals. For example, the United Stated launched income support programs such as Social Security for the old, unemployment compensation for those who lose their jobs, and Aid for Families with Dependent Children (AFDC) for low-income families during the Roosevelt administration in the 1930s. 1 Today, most developed countries devote significant means and effort to redistribution to those with low incomes. However, both the level of generosity and the structure of the programs vary substantially from country to country. Northern European and Commonwealth countries have developed substantially more generous programs than Southern European countries and the United States. Levels of generosity have steadily increased in Europe while there has been a cutback in the United States since the 1980s. The United States targets aid to specific groups, such as the disabled, single-parent families, and the old, and often imposes tight limits on the duration of benefits, 2 whereas many European countries have developed almost universal welfare programs covering most individuals with low incomes, 3 and the duration of welfare payments and unemployment insurance is often much longer. Redistributive programs toward the poor generate substantial controversy among policy makers and economists. At the center of the controversy is an equity–efficiency trade-off. On the one hand, governments value redistribution and want to transfer resources from the middle-and high-income earn-ers toward low-income individuals. On the other hand, such transfers are generally costly in terms of economic efficiency. First, raising taxes to finance