income inequality

proportional tax structure

% of income paid in taxes if fixed as income changes -flat percentage, no matter how much you make, you will pay the same % -flat tax -payroll taxes/Federal Insurance Contributions Act (FICA)- medicare tax=national health insurance for people over 65 and people with disabilities -> everyone pays 1.45% -ex: family A earns 10,000, family B earns 50,000 but they both get taxed the same 20%

progressive tax structure

-% of income paid in taxes increase and income increases -US federal income tax, estate taxes -ex: family A makes 10,000 and is taxed 10%; family B makes 50,000 and is taxed 20%

The Gini coefficient

-compares the area between the line of equality and the Lorenz curve -numerical values that tells you how bad income inequality is A/(A+B) -A= area of inequality -A+B= total area 0=perfect income equality (0/1=0) 1= perfect income inequality -> one person holds all the wealth (1/1=1, A+B/A+B=1) -between 0 and 1, closer to 1, more income inequality; closer to 0, the less income inequality there is

distribution of incomes

-factor markets are where most of us get the largest shares of our income (distribution of income is based off of productivity and the price of the good you are producing) -the distribution of income is therefore determined by the price of the resources the people own -physicians earn a lot more money than teachers because the product that a physician provides is of greater value to the economy and they put in more time for education and training so their salary will be a return of their investment

what causes income/wealth inequality?

-incomes vary depending on your job (product produced is greater in value to economy -> higher income) -unequal resources (if you have access to better education and better opportunities, gonna be able to do better than people who don't have those resources) -inherited wealth -structural inequality in education and job opportunities

taxes

-required contributions, levied by the government on personal income and business profits or added to the cost of some goods, services, and transactions reason why there are taxes: -raise revenue to finance government operations (public goods- highways, defense, employee wages) -influence economic behavior of firms and individuals to meet social goals (ex: excise taxes on tobacco raises tax revenue and discourages the use of cigarettes) -redistribute income

The Laffer Curve

-shows relationship between tax rate and tax revenue -if the gov taxes but keeps revenue low, they will increase their tax revenue -if the tax rate becomes too high, tax revenue will fall since workers have no incentive to work (not going to work extra hours if you have to pay 60% tax rate, if 100% tax, not going to work at all) -if the government increase taxes rates tax revenue will increase -x axis: tax revenue -y-axis: % tax rate

regressive tax structure

-taxation on consumption (can only tax with flat amount, can't tax based on income) -percentage of income paid in taxes decrease as income increases -lower income individuals pay a higher percentage than wealthy individuals -sales tax (gov creates a tax that ends up being regressive)- everyone pays the same dollar amount in taxes but that dollar amount represents a larger percentage of a smaller income (no tax on food or household items) -ex: Family A makes 10,000 and Family B makes 50,000 and they pay have to pay $2000, but this is 20% of Family A's income and only 4% of Family B's income

how to graph the Lorenz curve

-they will say the lowest quintile is 3.1, the second quintal is 8.2, the third quintile is 14.3 etc -to find the bottom 20%, it is 3.1 -to find the bottom 40%, it is 3.1 + 8.2 = 11.3 -to find the bottom 60%, it is 3.1 + 8.2 + 14.3 = 25.6

Tax principles

1. Ability to pay- people should be taxed according to their ability to pay, regardless of the benefits they receive (progressive tax structure follows this principle) 2. benefits received- those who benefit from government goods and services should pay in proportion to the amounts of benefits received (paying tax on a good that you are receiving benefit from) (regressive tax structure follows this principle) -ex: gas tax, charge 12 cents per gallon to spend on transportation related improvements so you benefit off of that improvement

What can the government do to redistribute income?

1. progressive taxes- tax rate increases as income increases (increase taxes on the wealthy and give the money to those with less money) 2. raise the minimum wage (price of good also goes up, but that increase in money would go to paying the worker a higher wage) -the area in the Lorenz curve gets smaller when the government re-distributes income (less income inequality)

The Lorenz Curve

A graph that shows the % of a country's income by each quintile (20%) -x axis: percent of households (everyone in the US and then broken up by quintiles, ex: bottom 20%, second, third, and fourth quartile, and top 20%) -y-axis: percentage of income (broken up by quintiles too) Line of Equality -this is perfect equality -this is your benchmark of equality where everyone has an equal share of income (no income inequality) - 45 degree line (straight linear line) - bottom 20% holds 20% of total income - bottom 40% (second quintile) holds 40% of total income and so on The Lorenz Curve -an actual curve which represents the actual distribution -gives you info on the percentage of income each quintile holds -bottom 20% (first quintile) holds 5% of total income -bottom 40% (second quintile) holds 10% of total income -in total, the bottom 40% holds 15%, but the second quintile holds 10% of income - bottom 60% (third quintile) holds 15% of total income -top 20% (fifth quintile) holds 45% of total income -compare Lorenz Curve to line of equality and the area between the two curves (the larger the area, the more income inequality there is; the smaller the area, the less income inequality there is)

If a government imposes a redistributive income tax on the top 50% of households, how would the following change? A. the Lorenz Curve B. the Gini coefficient C. Line of equality D. The income distribution

A. move closer to the line of equality B. decrease and get closer to 0 C. doesn't change D. more evenly distributed

measures of income inequality

The Lorenz Curve

tax structures

proportional, progressive, regressive