It is impossible to implement any type of policy without producing some implicit grant effects, and these effects are rarely taken into consideration, partly because they are very difficult to detect. However, simply because a problem is difficult does not mean that we should abandon it. The redistributive effects of fiscal policy depend greatly on the specific form actually taken by tax increases or reductions, or by increases or reductions in spending. Who pays the increased taxes, and who is spared from paying the reduced taxes? Who receives the increased spending, and who stops receiving the reduced spending? Of course, there is no general answer to these questions; each specific case must be examined.
Thus, the 1964 tax cut in the United States, which was highly successful in terms of general fiscal policy, since it helped produce a decade of near full employment, may very well have had a redistributive effect in favor of the rich. As implemented, a tax reduction almost always causes redistributions in favor of the rich. When tax reductions take the form of concessions to firms or a decrease in the progressivity of the tax system, the implicit grants to the rich may be even greater.
On the government spending side, public works also frequently benefit the rich more than the poor. Highway construction subsidies, for example, are a grant to those who own automobiles. Even if 80 percent of the population owned a car, this would still mean an implicit grant in their favor and against the 20 percent who do not, who are generally located at the lowest income level.
For this reason, fiscal policy, as a means of achieving stable full employment, must also be examined in light of its implicit redistributive effects. Government budget deficits, for example, have a direct effect as an increase in the amount of money held by the public, but the question “which public?” is rarely asked. In the first instance, the redistribution of increased money stocks is rarely uniform, and even the macroeconomic effects of this increase in stocks depend significantly on who receives them. For example, if they are directed mainly toward the rich through tax reductions at higher income levels, and so on, the effects will be very different from what they would be if they were directed toward the poor.
The distributive effects of so-called monetary policy have received even less consideration. The object of these policies is generally to make loans cheaper and easier to obtain during periods of depression, and more expensive and difficult to obtain during periods of inflation. The main macroeconomic impact, therefore, falls on investment rather than on consumption, although consumption may be affected by household loans, mortgage loans, other forms of consumer credit, and also by changes in the amount and distribution of money stocks.
The redistributive effects of these measures are generally unknown, but they cannot be assumed to be insignificant. Just as the richer part of the population uses highways, the richer part of the population also uses credit. Therefore, easier credit conditions may easily operate as a subsidy to the richer part of the population, although they may also make it possible, especially for local governments, to obtain credit for purposes that in fact subsidize the poor.
Similarly, there is some suspicion that more restrictive credit conditions may affect the rich more adversely than the poor. This is not an unquestionable conclusion, and such conditions may, for example, simply lead to redistributions among the rich.
The redistributive effects of higher interest rates are almost entirely unknown. A rise in interest rates redistributes income against those who pay interest and in favor of those who receive it. But whether those who pay interest are richer or poorer than those who receive it is something we simply do not know. Some studies suggest that higher interest rates discriminate against poorer borrowers, but to what extent, once again, we do not know.
Similar problems arise when considering the redistributive effects of inflation. Recent studies have suggested that inflation does not represent a very heavy burden for the poor, certainly in comparison with deflation and unemployment, which redistribute income against the poor and in favor of the less poor. We do not really know who “pays” for inflation.
It is evident that inflation must have a considerable redistributive effect through implicit grants. It harms pensioners, people receiving fixed incomes, “sticky” incomes and contractual incomes, and benefits those who earn profits and those who are in strong bargaining positions. However, beyond these broad propositions, we know very little about how inflation redistributes income.
For example, there is some evidence that, during inflationary periods, the wages of non-unionized labor rise more rapidly than the wages of unionized labor. This conclusion may seem surprising at first sight. But it follows that one of the main effects of trade unionism and labor organization is to make wage setting a time-consuming process, so that, during an inflationary period, the mere time involved in negotiations over unionized labor wages creates a lag, despite certain cost-of-living clauses in contracts.
