Lecture 20 POLS 207Outline of Last Lecture: Income InequalityI. Definitions of incomeA. Pre-taxB. Post-transferC. Money incomeII. Increasing income inequality since the 1960sOutline of Current Lecture: More About Income Inequality and TaxesI. Income inequality among the statesA. Differences in economic development is no longer the simple answer.B. Poorer states have more income inequality than richer states do.II. “Tax level” v. “Tax burden”A. Elaboration on regressive tax systemsCurrent Lecture:**Note on PowerPoint slide data: Don’t worry about the specific numbers as much as big-picture patterns. Recapping the previous lecture, how do we account for income inequality? There are a lot ofexplanations, but there’s no magical agreed-upon answer.Looking at “income inequality” AMONG the states…- Over the last 25 years, the explanation for the “inter-state” variation in “inequality” has become more complicated…”economic development” is no longer the “magic bullet” explanationMore inequality: NY, CT, LA, MA, FL, ALLess inequality: ID, IA, NH, WY, UT TX is sort of in the middle There is a reasonable relationship between economic development and decreasing income inequality. Poor states have more income inequality than richer states do.POSTSCRIPT: Because BOTH of these exercises (on the PowerPoint slide) use the Census Bureau’s definition of “income” (pre-tax, post-transfer, money income, which excludes capital gains and ‘in-kind’ g/s)……BOTH of them UNDERESTIMATE…- Degree of “income inequality”- The “standard of living” (measured by median household income) of the different “income classes”o There are many sources of income that this statistic doesn’t count – things like food stamps, capital gains, insurance premiums, 401k’s, etc.- Both of the above points mean that we are living “better” than we think we are, but we are also living more “unequally”Now, a bit about everyone’s favorite subject…TAXES“ Tax level” v. “Tax burden” (Dollar amount being paid in taxes v. Percentage of income that your taxes comprise)Who bears the state/local “tax burden”? SEE PP SLIDE for lots of numbers and charts and such. No matter how you look at it, state and local taxes are regressive (the taxes affect those in lower income brackets more, because the taxes are a larger percentage of their income than they are of those in the higher income brackets).Some conclusions:- Texas’ tax system is “regressive”- It is more regressive than those of most other states.- Between 2002 and 2007 TX taxes became MORE “regressive” both compared to itself (historically) and compared to other states - REMINDER: 75% of TX state government revenue from “sales” taxes- Tax burden in Texas is fairly low. However, Texas’ tax system is more regressive than most other states’ systems.CAUTIONS:- None of this takes into account FEDERAL taxes (e.g. personal income, payroll, etc.)- Substantially “progressive” overall- Does NOT include estimates of “who benefits” from government EXPENDITURES (This is really complicated!!!)Reminder: “Tax fairness” (“tax burden” by income class) You CANNOT classify degree of recessive system from bar graphs on page 477MT and TX are similarly ranked in their overall AVERAGE “tax burden” BUT people within TX (compared to MT) pay significantly different percentages of their income in state and local taxes, depending on their “income class.” MT’s tax system is LESS regressive than Texas’.We know this (relative) ranking by examining the (right-side) bar graph on “tax burden” on page 477- MT: 38th lowest in average “tax burden” as of 2007 (fairly low as percentage of income)- TX: 43rd lowest in average “tax burden” as of 2007 (fairly low as percentage of