Poverty The Distribution of Income 11 21 2013 Measuring the Distribution of Income Quintile o Dividing some data into 20 increments a single quintile is 1 5 of the total Rank all households by annual income lowest to highest Calculate the of the total income that is earned by each quintile Quintiles of Family Income 2008 Distribution of Family Income in 2008 Distribution of Family Income over Time Should the Gov Redistribute Wealth Philosophies o Utilitarianism Society should transfer income from one individual to another if it will create a net increase in utility o Liberalism o Libertarianism Society should focus on the least well off person in society and maximize their well being Society should not empower the government to redistribute income under any circumstances Poverty Relative Poverty quintile Absolute Poverty o Inadequate income compared to others in society Income for the top quintile income for the bottom o Income that is inadequate to satisfy basic needs Poverty Rate Poverty Line of people below the poverty line The level of income below which a family or individual is considered poor Established in early 1960s thanks to Molly Orshansky Measuring Income Disparities Measure o Income for top quintile Income for bottom quintile o Paul Krugman Quality of Life o Despite being a very rich country the United States has high infant mortality rates and low life expectancy o Our poor are excluded from some very basic benefits Wealth Breeds Political Power o More than of the Bush tax cuts favored the richest 1 families o Plutocracy Government rule by the rich Economist com The increasingly unequal distribution of income is due to the rich getting richer not the poor getting poorer Even low income individuals can afford luxuries that were inconceivable a generation ago and the poor of the United States are much better off than the poor of other countries o The US is a land of opportunity and many of the very rich are Income Mobility self made Poverty Poverty Line Poverty Rate poverty line Poverty Line o An absolute level of income set by the government for each family size below which a family is deemed to be in poverty o The of the population whose family income falls below the Equity v Efficiency Arthur Okun and the leaky bucket analogy 3 sources of inefficiency o Administrative costs of raising money taxes and distributing the benefits taxes o Incentives among higher income individuals to avoid paying o Incentives among lower income individuals to become eligible for benefits Income Tax Income Tax o Largest source of revenue for the Federal government 43 o A tax on individual or family income from all sources wages interest on savings dividends from shares in corporations profits from small businesses Tax liability How much the family owes depends on income o The 2nd largest source of revenue for the federal government o Called social insurance taxes because the revenue from these taxes is earmarked for Social Security and Medicare o FICA Federal Insurance Contribution Act Payroll Tax Payroll tax 42 Other Taxes Corporate Tax o A corporation is a business that is set up as a legal entity o The corporation is taxed on its profits Excise Tax o A tax on specific goods like cigarettes alcohol or gasoline o Is often implemented as a corrective tax Income Tax Systems Proportional Tax income Regressive Tax than low income taxpayers Progressive Tax than low income taxpayers Marginal vs Average Tax Rates Average Tax o Taxpayers pay the same fraction of income regardless of o High income taxpayers pay a smaller fraction of their income o High income taxpayers pay a larger fraction of their income o Total taxes paid divided by total income o Measures the sacrifice a taxpayer makes Marginal Tax Rate o The extra taxes paid on an additional dollar of income o Measures the incentive effects of taxes on work effort saving etc US Federal Income Tax Rates 2010 The US has a Progressive Income Tax o Taxes and Efficiency 1 tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers The costs to taxpayers include o The tax payment itself o Deadweight losses o Administrative burden Deadweight Losses Taxes distort incentives cause people to allocate resources according to tax incentives rather than true costs and benefits Administrative Burden Includes the time and money people spend to comply with tax laws Encourages the expenditure of resources on legal tax avoidance o Ex hiring accountants to exploit loopholes to reduce one s tax burden Is a type of deadweight loss Lump Sum Taxes Lump Sum Tax o Is the same dollar amount for every person o Ex Lump Sum Tax 4000 person o A lump sum tax is the most efficient tax o Causes no deadweight loss Does not distort incentives as a person s decisions have no tax consequences o Minimal administrative burden No need to hire accountants keep track of receipts etc o Regressive Relative to income the poor pay much more than the In dollar terms the poor pay as much as the rich Consumption Tax rich Tax people based on what they consume rather than on what they earn European Value Added Tax Pro o Incentive to save o Incentive to work o Simplicity and fewer loopholes Policies to Reduce Poverty Cash subsidies v In kind welfare o Cash benefits to recipients o In kind are programs that deliver goods such as medical care food or housing Categorical welfare v Means tested welfare o Categorical programs with benefits that are restricted by some demographic characteristic single parent households o Means tested programs with benefits that are tied to income levels or assets Cash Subsidy Means Tested An example of a cash subsidy that is means tested is a policy that provides income assistance in the form of cash to anyone whose incomes fall below 15 000 yr Subsidy will increase income such that is equals 15 000 Negative Income Tax Negative Income Tax o A tax system that collects revenue from high income households and gives transfers to low income households o Example Taxes owned 1 3 of income 10 000 Example The Labor Market 11 21 2013 Neoclassical Model of Distribution Assumptions o The typical firm is a price taker In the market for the product it produces In the labor market o Firm s goal is to maximize profits Each firm s supply of output and demand for inputs are derived from this goal Factors of Production Factors of Production o The inputs used to produce goods and services Labor Land Capital Equipment and
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