[ppereira]

2. Actually, with respect to progressive or negative taxation, the redistribution is quite direct. The government takes more from some and distributes it to others through benefits, the EITC, welfare, tax credits, etc. The factor most correlated to income inequality is not total tax revenue and government spending, but the amount of progressivity in the tax scheme.

There are also many market models, only one of which I cited above, that describe the evolution of the income distribution in response to changes in tax schemes. The models are complicated but their basic ideas are not. The redistribution changes market incentives and capitalism does its job to modify the Pareto coefficient and income inequality.