3 - Inequality, Poverty, Taxes and Transfers Flashcards
for what 2 reasons should governments intervene
- market failures
- redistribution = free market generates inequality - even if maximising efficiency
what is the efficiency and equity tradeoff?
- taxes redistribute and reduce income inequality
- but high taxes on the rich can reduce incentive to work and create a tradeoff between efficiency
what are the 2 streams that makeup income inequality
labour income inequality
capital income inequality
what are the reasons for L and K income inequality
L = abilities, effort, institutions
C = wealth differences, rates of return
where is inequality more concentrated in income or wealth
wealth
top 1% wealth holders = have 40% total wealth
top 1% incomes = 20% total National income
in past 50 years what is happening to capital shares
they are increasing in most countries
why is private wealth > public wealth
- private wealth is increasing
- public wealth is decreasing
- because most govs run BD
where is inequality higher in income or in wealth distribution
income inequality < wealth inequality
how do we measure income inequality
using gini coefficient
what is the equation to find gini
gini = 2 * area between 45 degree line and Lorenz curve (L(p))
what is the gini coefficient
how do you find it
- find A using trapezium area formula
- use 0.5-A/0.5, or 2B
what is the Lorenz curve
Lorenz curves graph percentiles of the population against cumulative income or wealth of people at or below that percentile
what does L(52) mean
lorenz curve at the percentile 52
is the fraction of total income earned by individuals below percentile 52
what do gini = 0 and gini = 1 indicate in terms of equality
0 = perfect equality
1 = complete inequality (the top person holds all the income)
in the UK what is the cumulative distribution of UK fiscal income
- bottom 50%
- top 1%
- bottom 50% = have a 11% share of total fiscal incom
- top 1% = have 15%
what is the U shaped trend in inequality
- income inequality increasing substantially since 1970
- bottom 50% income has stagnated since 1980 even though average increase in GDPpc
- gender gap decreased but remains at top
- wealth and income inequality very high early 20th century
- 1930-1950 = big decrease - most rich people hit the hardest
- inequality rising since 1980
- wealth inequality is not rising as fast as it was before
what is UK current income inequality like compared to historic
- UK is much more equal now than it was in the early 20th century
- but compared to rest of EU is the most unequal
what is the absolute poverty rate
fraction of population with disposable income below the poverty threshold = 1.90
- which is fixed in real terms
- $1.90/day
- in UK fixed to 60% of median income in base year 2011
what is relative poverty rate
fraction of population with disposable income below poverty threshold
- which is fixed relative to median
- EU = 60% of median average income
uk
- below 60% of the median in that year
what is the difference between relative and absolute poverty measures
relative = captures inequality - as average incomes increase so does the threshold
absolute = captures growth and inequality - threshold stays the same regardless of increase in incomes
what is the global poverty trend
decreasing
how does relative poverty depend on income
when median income increases - relative poverty decreases
when median income decreases - relative poverty increases = more people will fall below the threshold
how is absolute and relative poverty changing in UK and US
UK
* absolute poverty fallen substantially
* relative poverty increased and remained constant
USA
* absolute poverty hasnt fallen even though huge economic growth
what has happened with relative and absolute poverty for UK in recent years
- absolute = fell by 1 pp
- relative = fell by more than absolute - 1.7 pp (but this is because median income has fallen because of covid)
what is intergenerational income mobility
the degree that a persons position in income distribution changes from generation to generation
- do childrens success depend on their parental income
- can parents income predict their childs future income
what does income inequality have anything to do with intergenerational income mobility
- want to test what the probability of a child moving from low income to high income (does their success depend on their parents)
- low mobility = less likely to differ from parents income rank
what is the relationship between income inequality and income mobility
Chetty 2014
- places with low income inequality tend to have high mobility
- high mobility =
- low segregation
- good schools
- high social capital
- high family stability
Chetty 2014
intergenerational mobility
what does Chetty 2014 test
what is the average income rank of children by income rank of parents
what does Chetty 2014 find
- US has less mobility than EU countries
- heterogeneity in mobility across cities in US (south east is lowest)
- high mobility = better schools, low segregation, high family stability
- racial disparity in mobility
- US = 7.5% probability that child born to parents in bottom 1/5th of income distribution reaches the top 5th –> a lot less than Canada
Carneiro 2022
intergenerational income mobility in England
what does Carneiro 2022 test
estimates absolute income mobility for kids 1980s england
what does Carneiro 2022 find
- North = lowest mobility
- south = highest - low income children can move up higher in income distribution
- children from low income families who grew up in lowest mobility areas (north) end up 15 percentiles lower at age 28 compared to those from the highest mobility areas
- educational achievements across areas explain a lot of the variation
- education policy is key to equalise opportunities of children from low-income families
what does higher intergenerational mobility indicate
1 and 0
1 = high
* no correlation between parents income rank and childrens rank
* childrens income not dependent on their parents
0 = low
* parents income rank perfectly predicts childrens rank
how does intergenerational mobility graph work 0 and 1
0 = 45 degree line
- perfectly predicts
1 = flat line
- no correlation at all
what is a neutral tax/transfer system
the tax is proportional for both poor and rich
what is progressive tax system
- inequality in y < inequality in z
- tax is redistributive
- the more you earn the more you need to pay
- rich pay higher proportion of their income towards taxes
what is regressive tax system
- inequality in Y > inequality in Z
- tax rate decreases as tax payers income increases
how are taxes in UK progressive
- average tax rate increases with income
- at each income there is a range of average tax rates
- people fax different statutory rates depending on the form of income (self employed/employed)
