mEcon Ch13: Inequality

Relative Poverty

-A measure that compares resources relative to the material living standards of contemporary society -Takes into account the living standards of those around you as what is considered essential is dependent on what everyone else in the community has

Poverty Trap

-A recipient of the social safety net would pay more in taxes & receive less of the benefits from the social safety net if they took a higher paying job, so it reduces their incentive to find a better job

Regressive Tax

-A tax where those with lower incomes pay a higher share of their income on the tax compared to people with higher incomes -Are based on the things consumed rather than money earned (sales tax) -The rich tend to spend a smaller share of their income & reinvest to save & build wealth -The poor tend to spend a higher share of their total income on consumer goods, so sales taxes take even more of that money

Wealth

-All the assets that you currently own -Savings, Cars, Houses, Property

Poverty Line

-An income level below which a family is defined to be in poverty

Permanent Income

-Average lifetime income -Less inequality in comparison to annual income -People earn less when young and more when they get older

Social Safety Net

-Cash assistance, goods & services provided by the government to improve the lives of those living in or near poverty -Raises money through taxes

Equality-Efficiency Trade-Off

-Efforts to equalize the distribution of income raise total well-being -Tax & redistribution programs are costly because they distort incentives, thereby reducing the work effort

Safety Net Programs are means tested

-Eligibility into the program depends on income -Ensures that the benefits reach those truly in need

Tax Breaks

-If saving for retirement, money saved is not taxable -Money paid for interest on a home is not taxable -Tuition payments are not taxable -Tax breaks reduce the progressiveness of the tax system

Disability Insurance

-Insurance against developing a work-limiting disability -Paid through a tax on workers & employers

Workers' Compensation

-Insurance against getting injured at work -Employers are required to buy it

Unemployment Insurance

-Insurance against losing your job through no fault of your own -Paid for by a tax on employers

Social Security

-Insurance against the elderly outliving their savings (retirement) -Paid through a tax on workers & employers

Absolute Poverty

-Judges the adequacy of resources relative to an absolute or unchanging standard -Remains the same across all countries through most of history

Taxes that fund most social insurance programs are not progressive

-Many of the taxes that fund the social programs are proportional, flat tax rates regardless of income level

Why do some of the wealthiest people pay a lower share of their income in taxes?

-Many of the wealthy get a portion of their income through investments -Some investment gains are excluded from taxes depending on how long the asset is held before selling -There are many tax breaks offered to higher-income people

Equality-Efficiency Trade-off cont

-More equal incomes may come at the cost of lower average income -Perfectly equal outcomes (same income) reduce the incentive to work harder, resulting in depleted production -No redistribution would decrease taxes and lower taxes would increase the incentive to work -Total production would rise but the poor and elderly would receive no assistance -There has to be an efficient balance between the 2 -Extreme efficiency comes at the cost of terrible inequality & perfect equality comes at the cost of terrible inefficiency

Spending Inequality < Income Inequality

-People with temporarily high incomes save more -People with temporarily low incomes go into their savings or borrow money to prevent their consumption from falling as much as their income -The rich don't spend a significant portion of their income, but the poor do

Redistribution can increase total well-being

-Redistributing a small portion of the riches income to the poor will increase the satisfaction of the poor significantly while decreasing the satisfaction of the rich insignificantly so the total utility will be higher

In-Kind Transfers

-Restrict the recipient's choices to only those approved by the program -Makes it more palatable for voters whose taxes are being used to fund these programs

Intergenerational Mobility

-The extent to which the economic status of children is independent of the economic status of their parents -The extent to which children can advance their socioeconomic position in comparison to their parents -Roughly half of economic advantage/disadvantage is transmitted from household to child -Social environment, parents, house you grew up in matter, but so does hard work, investments, & luck

Marginal Utility

-The increase in satisfaction(utility) that you get from each extra dollar earned

Income

-The money you receive over a period of time -Wages, stocks, government bonds, etc.

Poverty Rate

-The percentage of people whose family income is below the poverty line -Remains quite stable, so those at the bottom of the income distribution don't hold a share of the rising prosperity

Wealth Inequality > Income Inequality

-The rich hold onto more money & can pass it onto the next generation -The poor tend to live paycheck to paycheck & don't have much to pass down

Effective Marginal Tax Rate

-The sum of higher taxes & reduced benefits accruing from each dollar you earn -Those with low incomes can face high effective marginal tax rates even though they may be earning more through work, so their living conditions don't improve by much

Problems of redistribution

-There's no easy way to redistribute money from the rich to the poor -Administrative costs subtract from what you can redistribute -Taxes & means-tested programs reduce the incentive to work -Higher income taxes reduce the rewards from working, so high earners may respond to this by working less

Progressive Tax

A tax in which those with more income pay a higher share of their income in taxes

Supplemental Nutrition Assistance Program

An in-kind benefits program that provides funds for groceries for all low-income people

Social Insurance Programs

Are not means-tested & are insurance programs designed to cover everyone, regardless of income

Law of Diminishing Marginal Utility

Marginal utility is large when you have low income but diminishes as you get richer

Medicaid

Provides Health care for low-income families with dependent children, disabilities, elderly

Medicare

Provides health insurance for the elderly- Paid by through a tax on workers & employers

Supplemental Security Income

Provides money for low-income elderly

Temporary Assistance For Needy Families

Provides temporary financial assistance for low-income families

Social Insurance

Public government programs meant for everyone in society as a means to aid those experiencing unemployment, illness, work-limiting disabilities, etc.

Housing Vouchers

Subsidized rent payment to help low-income people pay their bills

Earned Income Tax Credit

Tax reductions given to working low-income working families

Poverty

When below the poverty line