Income, Equity and Disparity Flashcards
Macro Goal
- Establish equity in the distribution of income in a country
- Disitinguish between equity and equality
- Distinguish between absolute/extreme poverty and relatively poverty
Causes of Poverty (6)
- Inequality of oppourtunity
- Different levels of resource ownership and human capital
- Discrimination (gender, race, others)
- Globalization
- Technological change
- Unequal status
Measuring Poverty
Single indicators:
- International poverty lines
- Minimum income standards
Composite indicators:
- E.g. Multidimensional poverty index (MPI)
Consequences of Poverty
- Low living standards
- Lack of access to sufficient health care
- Low levels of education
Lorenz Curve
Shows the income distrubution of the economy
- 45º line shows perfect income distribution
The further away from the curve, the unequal the country is
Gini Index
Gives the exact measuremant of the income distribution of the economy.
It is a number between 0 - 1 or 0 - 100:
The closer to 0 - the more equal it is
The closer to 1 - the less equal it is
Income
Economics payment (rent ,wages, interest, profit) paid over a period of time. These can be earned or unearned.
Unearned - interest payments, inheritence, rent earned from real estate
Earned - salary
Wealth
Stock of economic goods and services owned and measured at a particular time
Direct taxes
Taxes on income:
- Income tax - tax on personal income
- Coporate tax - tax on profit
- Inheritance tax - tax on the transfer of income and wealth
Indirect tax
Taxes on goods and servives (including tariff)
Tax Systems
Progressive tax system - the rate of tax paid increase as income increases
Proportional taxes - The rate of tax paid remains the same regardless of income
Regressive taxes - The rate of tax paid decreases as income increases
Evaluation comments for Transfer payments
- Not included in GDP as they aren’t payments for goods or services.
- Government provision of merit goods helps distribute income
How governments use tax income
transfer payments - any payment that the government makes to a particular group of society.
Use to redistribute income from wealthier taxpayers to poor/in need to improve living standards.
Ways to make income distribution more equitable
- Taxation
- Transfer payments: subsidies, unemployment benefits and disability benefits
- Improve access to education and healthcare to create jobs and lower corruption
Further policies to reduce poverty, income and wealth inequalities
- Policies to reduce inequalities of opportunities/investment in human capital
- Transfer payments
- Targeting spending on goods and services
- Universal basic income
- Policies to reduce discrimination
- Minimum wage
Universal Basic Income (UBI)
- A government-guaranteed minimum income for every individual
- Very expensive - only an option for rich country
- Can only work if the people are responsive to the UBI
Pros of UBI
- Help people make ends meet during tough times
- Safety net for those in unstable jobs
- Allows some planning for the future
- Changes people’s attitude to work
- Relatively easy for government to administer
- Durring recessions, it would help cushion fall in AD
- Could help to break poverty traps
Cons of UBI
- Encourages laziness and over-relying on it
- Very expensive for government
- Unproven, experimental data
- Discourages working
- Renders taxes for low income brackets less useful
- Not helpful for tax payer
- Economy would see a significant rise in AD (inflation)
- Discourages individuals from taking up full-time jobs
Minimum wage
The minimum wage employers must pay for work, not negotiable
Pros of raising minimum wage (similar to Business)
- Work done by minimum wage workers cannot be done by machines
- Motivate people to work
- Higher productivity
- Encourage to stay in their jobs longer
- Reduce costs in hiring and training new workers
Cons of raising minimum wage
- Higher costs of production = higher prices to consumers
- Price of labor increase = machines replace workers
- Business that cannot afford to pay higher wages –> bankrupt –> unemployment
- Higher min. wage –> less demand for workers –> unemployment for unskilled workers working at min. wage
Average tax rate
- % of tax paid by an individual of their whole income
- total tax paid/income x 100
Marginal tax rate
- change in % of tax paid compared to change in income
- change in total tax paid/change in income x 100
