Week 4

Question 1

Lorenz curve definition

Answer 1

a graph which indicates income inequality by plotting the cumulative % of total national income against the cumulative % of the corresponding population (ranked in increasing size of shares)

Question 2

cumulative percentages of total income equation

Answer 2

cumulative income / total income

Question 3

line of equality definition

Answer 3

straight line on a lorenz curve that shows that the distribution of income is equal

Question 4

how to measure total inequality using the gini index

Answer 4

total inequality = 1

i.e. A = B

Question 4

what is the value of total equality using the gini index (A / B)

Answer 4

total equality = 0

i.e area A = 0

Question 4

Gini index definition

Answer 4

a statistical measure of the level of income inequality in an economy calculated by analyzing the size of any inflexion in the lorenz curve

Question 4

what are the 5 principles of a fair taxation

Answer 4

• easy to collect and administer
• collects a high proportion of taxes due
• does not lead to inefficient behaviour
• easy to understand
• equitable - vertical (redistribution of income) and horizontal (impacts equally for same circumstances)

Question 4

what determines the inequality in an economy using a Lorenz curve

Answer 4

the distance from the line of equality to the Lorenz curve determines inequality

Question 4

gini index equation

Answer 4

A / B
A is an area of graph below the line of equality
B is an area of graph below A

Question 4

what are the 4 purposes of taxes

Answer 4

• manage the economy
• redistribute income and wealth
• fund public and merit goods
• discourage demerit goods

Question 4

proportionate tax definition

Answer 4

a tax system that takes the same [percentage of income from all taxpayers, regardless of income

• individuals on low earnings experience a proportionately very high impact
• while individuals on high earnings proportionately very low impact

(everyone being taxes at 15%)

Question 5

regressive tax definition

Answer 5

a tax system that takes a reducing percentage of income from taxpayers as income rises

percentage of tax reducing as income rises

Question 5

progressive tax definition

Answer 5

A tax system that takes an increasing percentage of income from taxpayers as income rises

percentage of tax increasing as earnings do

Question 5

how is indirect tax a regressive tax

Answer 5

income—expenditure—taxes paid—tax as % of
income
£1000—-£200————–£130———–13%

£2000—£200—————£130————6.5%

this shows that indirect tax is a regressive tax due to as income increase the tax as a % of income decreases

Question 6

what are 7 ways to help reduce income inequality

Answer 6

• achieve real growth and employment (must happen first)
• make direct taxes more progressive (but must be careful with the incentive of doing this)
• provide free services
• employment regulation (minimum wage, impacts costs and efficiency for firms)
• level of state benefits (carries costs with that)
• public sector pay (ensuring minimum earning levels)
• careful application of indirect taxes (due to being regressive)

Question 7

what is the relationship between reducing inequality and disincentive

Answer 7

inverse relationship

• the more equal with more taxes for higher incomes, disinsentivices individuals to aim for higher paying jobs

Question 8

3 ways to make indirect taxes fair

Answer 8

• make them avoidable
• avoid taxing basic needs
• use for demerit goods