Taxes And Transfers Flashcards
Recall: when would gov intervention be used (2)
If market failures exist
or for redistribution
So if government intervene and redistribute with taxes and transfers:
Problem
Equity efficiency trade off
Market income equation (z)
Z = wl + rk
Z market income
W wage rate
l labour supply
r return rate on capital
Labour income inequality vs capital income inequality
Labour income inequality is due to differences in working abilities e.g education, talent etc
Capital income inequality is due to differences in wealth k (due to saving behaviour or inheritances etc)
Which is more more concentrated
Capital income inequality (a smaller amount of people carry a large proportion of total wealth)
Proportions of market income (z) for labour income (wl) and capital income (rk)
B) average rate of return on capital (r)
C) capital stock
Wl = 75% of market income
Rk = 25% of market income
B) 5-6%
C) capital stock is usually 400-500% of market income (value is 4/5x bigger than economy)
Capital share as % national income overtime
Increased
How to measure income inequality
b) value of 0 vs 1
Gini coefficient
b) 0 = perfect equality
1 = complete inequality
5 Empirical facts
(hint: labour income inequality, gender gap, top US income, bottom 50, top income)
In US labour income inequality has increased substantially
Gender gap has decreased but remains substantial especially at the very top
Top US incomes have dropped 1929-1959 but increased since 1980 (increased for most English speaking countries)
Bottom 50% pre-tax income has stagnated since 1980, despite 60% rise in average national income
Fall in top income shares 1900-1950 in most OECD countries
Absolute vs relative poverty
Absolute poverty is the fraction of population with disposable income below threshold $1.90
Relative poverty is fraction of population with income below median income (60%)
Which one falls with economic growth
Absolute poverty falls in long run, but relative poverty may not
Which captures growth and inequality effects
Absolute poverty captures both, relative only captures inequality effects
How many people lifted out of extreme poverty 1990-2017
1.2bn
Poverty expression
We assume poverty is based on consumption, so model C
C = Z - T(Z) + B(Z) + E - s
T(Z) is tax
B(Z) is gov transfers
E is net private transfers e.g charity, family, friends
S is net savings
Z - T(Z) + B(Z) is disposable income
Why is difficult to measure poverty at individual level
Since consumption goods can be shared within family, so difficult to measure at individual level
Thus we measure poverty at the family level!
So poverty is calculated at family level
US poverty guideline by size
a) for one-person household
b) 2 person household
(in poverty if <…)
1 person - $12,880
2 person - $17,420
Elderly poverty rate
fallen, now the lowest out of nonelderly and children
Factors explaining evolution of poverty in US
Increasing pre-tax inequality: stagnant bottom wages
(Large effect)
Changes in family structure: more single parent families (large effect)
Increase in female labour force participation reduces poverty rate since 1980s (large effect)
Immigration has increased poverty rate slightly between 1969-1999
Means-tested transfers (medium effect)
Issues with US poverty rate definition
Doesn’t include in-kind transfers, which have grown substantially
Payroll tax and income tax credits have grown substantially for low income families
CPI overstates inflation
How have they worked to shift recompute poverty rate, and the effect they’ve had
Move towards households rather than family level; some effect; depends on how sharing is done
Shift to after-tax (to account for tax credits etc) (some effect)
Add non-cash benefits e.g school (some effect)
Add health insurance - large effect
Change price index (overcome inflation overstate) (some effect)
Relative, official vs absolute poverty rate
Relative rate 16%
Official 10.5%
Absolute 1.6%
Measuring intergenerational income mobility
Consensus is children’s success should not depend too much on parents income
Findings on mobility
US has less mobility than European countries (so rich parents lead to rich kids, not so much so in EU esp Scandinavia)
Large heterogeneity in mobility across cities in US
(Higher in Cali and Washington DC, lower in Atlanta)
Places with low segregation, low income inequality, high family stability tend to have high mobility
How did they measure mobility
Measure average income rank of children and then the rank of their parents
American dream is the probability of a child born to parents in bottom 1/5 of income distribution reaches top 1/5.
Country comparison
USA 7.5%
UK 9%
Denmark 11.7%
Canada 13.5%
Shows US is actually harder to get rich from poor
Revisit post-tax (disposable income) equation
y = z - T(Z) + B(Z)
If post tax y inequality is less than inequality in pre-tax income
Since post tax inequality is less, means tax/transfer system is redistributive/progressive
If more, then regressive tax/transfer system
What if y = z(1-t)
Where t is tax and is constant
Then tax/transfer system is neutral
What if y = z(1-t) + G
G is universal transfer
Tax/transfer system is redistributive/progressive
(Since adding income!)
Using US distribution national accounts, pg 45, is tax/transfer system progressive or regressive
Progressive
E.g top 0.001% contributes 1.9% income share pre-tax, but 1.4% post-tax
Bottom 50% was 12.5% income share pre-tax, but post-tax contribute 19.4% of total income share
US taxes
US tax system evolution
Progressivity has declined since 1970
As a result of decline progessivity in US, what has happened to share of income going to top 1%
Increased!
