Robin Hood Effect: What it is, How it Works

What Is the Robin Hood Effect?

Robin Hood effect is when the less well-off gain economically at the expense of the better-off. The Robin Hood effect gets its name from the English folkloric outlaw Robin Hood, who, according to legend, stole from the rich to give to the poor. A reverse Robin Hood effect occurs when the better-off gain at the expense of the less well-off.

The Robin Hood effect should not be confused with the Robinhood effect, which is the increased number, importance, and attention given to small retail investors using low-entry-barrier trading apps such as the Robinhood platform.

Key Takeaways

  • The Robin Hood effect is the redistribution of wealth from the rich to the poor. 
  • The Robin Hood effect can be caused by a large variety of government interventions or normal economic activity.
  • Because of differences in spending and investment at different incomes, fiscal policy can have a Robin Hood effect as a side effect of pursuing macroeconomic stability.
  • It should not be confused with the Robinhood effect, which has to do with the impact on markets of mobile trading apps and platforms.

Understanding the Robin Hood Effect

The Robin Hood effect is a phenomenon most commonly used in discussions of income inequality. In a Robin Hood effect, income is redistributed so that economic inequality is reduced. For example, a government that collects higher taxes from the rich and lower or no taxes from the poor, and then uses that tax revenue to provide services for the poor, creates a Robin Hood effect.

A Robin Hood effect can be caused by market-based phenomena or government economic and fiscal policies, not all of which are intentionally aimed at reducing inequality. Regardless of the cause, virtually any change in an economy's status quo can result in the redistribution of income; when that redistribution is in favor of lower-income people, that is a Robin Hood effect. In terms of economic efficiency, a Robin Hood effect by definition is never Pareto efficient because, even though it makes lower-income people better off, it always makes at least some higher-income people worse off.

Government tax policy is the most obvious mechanism for the Robin Hood effect. Examples include the graduated personal income tax rates, in which those with higher earnings pay a higher percentage tax compared to lower-income earners. Another example of a Robin Hood effect is the imposition of a higher road tax for bigger engine automobiles; higher-income individuals who can drive larger, more expensive cars can be expected to pay higher rates.

Normal economic activity and changing market conditions can also produce Robin Hood effects. For example, the construction of a high-density affordable housing complex next door to a large mansion could make the new lower-income residents better off, while imposing costs on the higher-income residents of the mansion via increased noise and congestion. Another example could be the formation of labor unions that increase the bargaining power of workers, benefiting them at the expense of their employers.

Objectives of Income Redistribution

At its core, the Robin Hood effect refers to the redistribution of income and wealth, often to rectify inequality. This concept often surfaces in politics as lawmakers debate how best to enact economic policy for the public good.

The objectives of income redistribution are to increase economic stability and opportunity for the less wealthy members of society, and therefore often include funding for public services. This relates to the Robin Hood effect because public services are funded by tax dollars, so those who support redistributing income argue the need to increase taxes for the wealthier members of society to best support public programs serving the less well-off members of society.

The premise for the need to redistribute wealth and income derives from the concept of distributive justice, which asserts that money and resources ought to be distributed in a way that is socially just. Another argument in support of income redistribution is that a larger middle class benefits the overall economy by increasing purchasing power, and providing equal opportunities for individuals to reach a better standard of living. Some proponents of the Robin Hood effect argue that capitalism creates an unequal distribution of wealth that should be rectified for the benefit of everyone.

The Robin Hood Effect and Macroeconomic Policy

In Keynesian economics, the preferred method to moderate economic cycles is fiscal policy: conducting deficit spending during recessions and running government budget surpluses during economic expansions. During both recessions and expansions, this prescribed fiscal policy can often have a Robin Hood effect. 

Because consumers’ Marginal Propensity to Consume tends to be higher at lower incomes, increased government spending and tax relief directed toward lower-income consumers can be expected to have a greater impact in boosting sluggish aggregate demand during recessions. So from a Keynesian point of view, it makes sense to run a fiscal policy that also has a Robin Hood effect during recessions.

On the other hand, increasing taxes to control “irrational exuberance” in investment and avoid an overheated financial sector during economic expansions will be most effective if it targets higher-income people because the Marginal Propensity to Invest tends to be stronger at higher incomes. The combined effect of government spending and tax relief directed toward lower-income people during recessions and higher taxes on investments by people with higher incomes during economic expansions can create a massive, economy-wide Robin Hood effect.

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