3.4 Economies of Inequality and Poverty Flashcards
What is the definition of “economic inequality”?
The uneven distribution of wealth
What is considered “absolute poverty”?
Incomes below a threshold required to access the most basic, life-sustaining goods and services.
(less than $2 a day)
What is considered “relative poverty”?
Only happens in countries that do not suffer from absolute poverty. It is a level of income below which their citizens would be struggling.
Incomes are below a given average in society
What is the difference between equity and equality?
The word equal is not the same as the word equitable. Equal implies ‘the same’, whereas equitable implies fairness or evenness.
In the lorenz curve, what is on the x axis and what on the y axis?
x axis - cumulative population
y axis - cumulative income
What is the line of equality?
A line with a gradient of +1, showing perfect distribution between cumulative population and cumulative income
What is the “GINI” coefficient?
“Gini coefficient is the ratio of the area between the line of equality and a country’s Lorenz curve and the total area under the line of equality”
How do you calculate the “GINI” coefficient?
Gini = a / a+b
What can a country do to lower the GINI coefficient?
Tax the rich –> Transfer to the poor
Why are countries not exactly ON the line of equality?
That would be a gini coefficient of 0,
and therefore communism
What are the 3 types of income taxes?
- Progressive tax
- Proportional tax
- Regressive tax
What is “progressive” tax?
“A progressive tax is based on the taxpayer’s ability to pay. It imposes a lower tax rate on low-income earners than on those with a higher income.”
What is “proportional” tax?
“A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income.”
What is “regressive” tax?
“A regressive tax is one where the percentage paid in tax rises the less a person earns.”
EG. VAT
VAT will take up a larger proportion of a lower-income wage, than of a higher-income individual
What is “wealth” tax?
Extra income on the wealthiest citizens, eg. US wealth tax 2% > 50m$
What might “high-tax” rates lead to?
- Tax evasion
- Early retirement option
- Disincentive to work
What are some forms of transferring money?
- Unemployment benefits
- Social security (child care.. pensions)
- Direct provision:
- Infrastructure
- Schools
- Hospitals
- other…
What does the “laffer” curve show?
The relationship between tax rates and the amount of tax revenue collected by governments
What argument can be shown by the “laffer” curve?
The argument that sometimes cutting tax rates can result in increased total tax revenue.
What is the “average tax rate”?
An average tax rate is defined as tax paid divided by total income, expressed as a percentage. [(total tax/total income) x100]
What is the “marginal tax rate”?
A marginal tax rate is defined as the tax rate paid on additional income. In the real world, income taxes in a progressive tax system are calculated using successive layers of income, and applying a different tax rate to each layer. The layers of income are called tax brackets, and the corresponding tax rates are called ‘marginal tax rates’.
