Measuring the Distribution of IncomeQuintile:Dividing some data into 20% increments; a single quintile is 1/5 of the totalRank all households by annual income, lowest to highestCalculate the % of the total income that is earned by each quintileQuintiles of Family Income: 2008Distribution of Family Income in 2008Distribution of Family Income over TimeShould the Gov Redistribute Wealth?PhilosophiesUtilitarianismSociety should transfer income from one individual to another if it will create a net increase in utilityLiberalismSociety should focus on the least well off person in society and maximize their well-beingLibertarianismSociety should not empower the government to redistribute income under any circumstancesPovertyRelative PovertyInadequate income compared to others in societyIncome for the top quintile/income for the bottom quintileAbsolute PovertyIncome that is inadequate to satisfy basic needsPoverty Rate% of people below the poverty linePoverty LineThe level of income below which a family (or individual) is considered poorEstablished in early 1960s, thanks to Molly OrshanskyMeasuring Income DisparitiesMeasure:Income for top quintile / Income for bottom quintilePaul KrugmanQuality of LifeDespite being a very rich country, the United States has high infant mortality rates and low life expectancyOur poor are excluded from some very basic benefitsWealth Breeds Political PowerMore than ½ of the Bush tax cuts favored the richest 1% familiesPlutocracyGovernment rule by the richEconomist.comThe increasingly unequal distribution of income is due to the rich getting richer – not the poor getting poorerEven 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 countriesIncome MobilityThe US is a land of opportunity and many of the very rich are self-madePovertyPoverty Line:An absolute level of income set by the government for each family size below which a family is deemed to be in povertyPoverty Rate:The % of the population whose family income falls below the poverty linePoverty LineEquity v. EfficiencyArthur Okun and the “leaky bucket” analogy3 sources of inefficiencyAdministrative costs of raising money (taxes) and distributing the benefitsIncentives (among higher income individuals) to avoid paying taxesIncentives (among lower income individuals) to become eligible for benefitsIncome TaxIncome TaxLargest source of revenue for the Federal government (43%)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)Payroll TaxPayroll taxThe 2nd largest source of revenue for the federal government (42%)Called “social insurance taxes” because the revenue from these taxes is earmarked for Social Security and MedicareFICA (Federal Insurance Contribution Act)Other TaxesCorporate TaxA corporation is a business that is set up as a legal entityThe corporation is taxed on its profitsExcise TaxA tax on specific goods like cigarettes, alcohol or gasolineIs often implemented as a corrective taxIncome Tax SystemsProportional Tax:Taxpayers pay the same fraction of income, regardless of incomeRegressive Tax:High-income taxpayers pay a smaller fraction of their income than low-income taxpayersProgressive Tax:High-income taxpayers pay a larger fraction of their income than low income taxpayersMarginal vs. Average Tax RatesAverage TaxTotal taxes paid divided by total incomeMeasures the sacrifice a taxpayer makesMarginal Tax RateThe extra taxes paid on an additional dollar of incomeMeasures the incentive effects of taxes on work effort, saving, etc.US Federal Income Tax Rates: 2010The US has a Progressive Income TaxTaxes and Efficiency1 tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayersThe costs to taxpayers include:The tax payment itselfDeadweight lossesAdministrative burdenDeadweight LossesTaxes distort incentives, cause people to allocate resources according to tax incentives rather than true costs and benefitsAdministrative BurdenIncludes the time and money people spend to comply with tax lawsEncourages the expenditure of resources on legal tax avoidanceEx) hiring accountants to exploit “loopholes” to reduce one’s tax burdenIs a type of deadweight lossLump-Sum TaxesLump-Sum TaxIs the same dollar amount for every personEx) Lump-Sum Tax = $4000/personA lump-sum tax is the most efficient tax:Causes no deadweight lossDoes not distort incentives, as a person’s decisions have no tax consequencesMinimal administrative burdenNo need to hire accountants, keep track of receipts, etc.RegressiveIn dollar terms, the poor pay as much as the richRelative to income, the poor pay much more than the richConsumption TaxTax people based on what they consume, rather than on what they earnEuropean Value Added TaxProIncentive to saveIncentive to workSimplicity and fewer loopholesPolicies to Reduce PovertyCash subsidies v. In-kind welfareCash benefits to recipientsIn-kind are programs that deliver goods, such as medical care, food or housingCategorical welfare v. Means-tested welfareCategorical: programs with benefits that are restricted by some demographic characteristic (single parent households)Means-tested: programs with benefits that are tied to income levels or assetsCash Subsidy, Means-TestedAn 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/yrSubsidy will increase income such that is equals $15,000Negative Income TaxNegative Income Tax:A tax system that collects revenue from high-income households and gives transfers to low-income householdsExample)Taxes owned = 1/3 of income - $10,000Example)Neoclassical Model of DistributionAssumptionsThe typical firm is a price takerIn the market for the product it producesIn the labor marketFirm’s goal is to maximize profitsEach firm’s supply of output and demand for inputs are derived from this goalFactors of ProductionFactors of ProductionThe inputs used to produce goods and servicesLaborLandCapitalEquipment and structures used to produce goods and servicesCircular-Flow DiagramDerived DemandIn the labor market, firms demand workers in order to produce goods and servicesDemand for labor is a derived demand – firms demand labor
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