Slide 1CHAPTER OUTLINEMeasurement: Income Inequality: 2009The Top 1%The Top 1%, 5%, 10%, 25%Measurement ProblemsReturns per PersonAdjusting For More ReturnsMaximum Tax Rate on Capital GainsMeasurement: Wealth Inequality 2010Share of Wealth of Top 10%Share of Wealth: Bottom 90%Median and Mean Wealth and Their RatioCosts and BenefitsIncome MobilityMeasures of MobilityIncome Mobility in the U.S.Intergenerational Income Elasticity29-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 29Income and Wealth Inequality: What’s Fair29-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Introduction•Measurement of Inequality•Causes of Household Income and Wealth Inequality•Costs and Benefits of Income Inequality29-3©2015 McGraw-Hill Education. All Rights Reserved Measurement: Income Inequality:2009•Percentage of Total Income Held by the•Top 1%: 16.40%•Top 5%: 31.17%•Top 10%: 43.44%•Top 25%: 67.37%•The Top 1% held 7.55% of income in 1978 and 22.5% in 200729-4©2015 McGraw-Hill Education. All Rights Reserved The Top 1%1968197019721974197619781980198219841986198819901992199419961998200020022004200620080.00%5.00%10.00%15.00%20.00%25.00%29-5©2015 McGraw-Hill Education. All Rights Reserved The Top 1%, 5%, 10%, 25%1968197019721974197619781980198219841986198819901992199419961998200020022004200620080.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%Conventionally Measured Income Inequality1% 5% 10% 25%29-6©2015 McGraw-Hill Education. All Rights Reserved Measurement Problems•More people are filing Income Tax Returns.•Later marriages•Fewer marriages•More people filing tax returns because the refundable tax credits (e.g. EITC) available to the poor motivate the poor to file.29-7©2015 McGraw-Hill Education. All Rights Reserved Returns per Person29-8©2015 McGraw-Hill Education. All Rights Reserved Adjusting For More Returns29-9©2015 McGraw-Hill Education. All Rights Reserved Maximum Tax Rate on Capital Gains29-10©2015 McGraw-Hill Education. All Rights Reserved Measurement: Wealth Inequality2010•Share of wealth held by •Top 1%: 34%•Top 10%: 40%•Median and Mean Wealth Their Ratio•Median: $77,300•Mean: $498,800•Mean/Median: 6.4529-11©2015 McGraw-Hill Education. All Rights Reserved Share of Wealth of Top 10%1989 1992 1995 1998 2001 2004 2007 2010303132333435363738394090-99% top 1%29-12©2015 McGraw-Hill Education. All Rights Reserved Share of Wealth: Bottom 90%1989 1992 1995 1998 2001 2004 2007 201005101520253035bottom half 50-90%29-13©2015 McGraw-Hill Education. All Rights Reserved Median and Mean Wealth and Their Ratio1989 1992 1995 1998 2001 2004 2007 2010010000020000030000040000050000060000070000033.544.555.566.57Median Wealth Mean Wealth Ratio29-14©2015 McGraw-Hill Education. All Rights Reserved Costs and Benefits•Costs•Social Instability when low income is viewed as permanent and unchangeable by the individual.•Lowers motivation to get ahead if attempting to do so is viewed as futile•Benefits•Capitalism requires that the individual be motivated by money and that if hard-working or innovative people are not rewarded they will be less likely to be productive29-15©2015 McGraw-Hill Education. All Rights Reserved Income Mobility•Up•The ability to rise out of your current economic circumstance•Down•The vulnerability to falling from your current economic circumstance29-16©2015 McGraw-Hill Education. All Rights Reserved Measures of Mobility•Percentage of the Population moving from one income quintile to the next.•What percentage of the population who are in the bottom/top X% in one year are also in the bottom/top X% ten years later. •Intergenerational Elasticity•The predictive power of parents earnings in explaining a child’s earnings.29-17©2015 McGraw-Hill Education. All Rights Reserved Income Mobility in the U.S. LowestSecond Middle Fourth Highest TotalTop 1%Lowest1987-1996 38.9 28.3 14.9 10.6 7.3 100 0.31996-2005 37.8 27.1 16.1 11.8 7.2 100 0.3Second1987-1996 14.2 33.8 26.4 16.4 9.3 100 0.21996-2005 15.8 30.1 28 17.2 9 100 0.2Middle1987-1996 6.1 17.4 33.9 28.4 14.2 100 0.31996-2005 5.9 14 32.6 31.1 16.3 100 0.3Fourth1987-1996 3 7.5 19.4 40.1 30 100 0.51996-2005 3.1 5.7 15.5 41.9 33.8 100 0.3Highest1987-1996 1.8 2.5 7.3 20.6 67.8 100 5.41996-2005 2 2 5.7 17.2 73.2 100 4.8Top 1%1987-1996 2.1 0.9 2.5 4.7 89.9 100 461996-2005 2.7 1 1.5 4.5 90.3 100 44.7All Income1987-1996 11.3 16.5 20.1 24.1 28 100 1.51996-2005 11.7 14.7 19.1 24.4 30 100 1.329-18©2015 McGraw-Hill Education. All Rights Reserved Intergenerational Income ElasticityCountry ElasticityDenmark 0.15 Norway 0.17 Finland 0.18 Canada 0.19 Sweden 0.27 Germany 0.32 France 0.41 United States 0.47 United Kingdom 0.50 A higher number reflectsmore explanatory power for the parents’ incomein predicting a child’s income. This research suggests that a poor U.S. child is more likely to be a poor adult and that this Effect is stronger in the U.S.than in
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