Week 4 - Inequality & Taxation

Question 1

Inequality

Answer 1

the difference in how assets, wealth, or income are distributed among individuals and/or populations

Question 2

Income inequality

Answer 2

the unequal distribution of income among individuals or households within a country

Question 3

Poverty (line)

Answer 3

an income level where household income is below a necessary level to maintain basic, satisfactory living standards (food, shelter, housing)

Question 4

Poverty rate

Answer 4

the percentage of the population whose family income falls below an absolute level (the poverty line)

Question 5

Lorenz curve

Answer 5

a graphical representation of the distribution of income or wealth in a society, by plotting cumulative income against income brackets

Question 6

Gini coefficienct

Answer 6

a measure of income or wealth inequality within a population. It ranges from 0 to 1

Question 7

What does a higher Gini coefficienct mean?

Answer 7

Generally, the higher the Gini coefficient, the more unequal distribution of income is in an economy
o =0 when there’s complete equality
o =1 when there’s complete inequality (one person earns all the income)

Question 8

What are the problems in measuring inequality?

Answer 8

Standard of living vs income
o People care about the ability to maintain a good standard of living rather than solely on income

In-kind transfers
o These are transfers to the poor in the form of goods/services rather than income (healthcare and education)

Normal life cycle pattern
o There is a regular pattern of income variation over a person’s life (empirically, we see a hump shaped pattern, with incomes rising until someone is in their late 40s, then slowly falling heading into retirement)

Transitory vs permanent income
o Income varies not only in a person’s life cycle but also due to random and transitory forces. People can borrow/lend to smooth out transitory variation of income

Question 9

Economic mobility

Answer 9

people’s ability to improve their economic status over the course of their lifetimes

Question 10

Policies to reduce poverty

Answer 10

• Minimum wage laws
• Social security
• In-kind transfers
• Anti-poverty policies and work incentives

Question 11

Taxation

Answer 11

charges levied by a government to raise revenue

Question 12

UK Government receipts

Answer 12

Income tax – A direct tax taken out of a person’s income

National insurance contributions – a direct tax on earned income paid by British employees and employers to fund government benefits programs

Value Added Tax (VAT) – an ad valorem indirect tax which is charged on the purchase of many goods and service

Corporation tax – a tax on the profits made by companies

Excise duties – indirect taxes on the sale or use of specific products, such as alcohol, tobacco, and energy

Council tax – a local tax that is paid by households in England, Wales and Scotland

Inheritance tax – a tax that is paid on the value of an individual’s estate after they pass away

Custom duties – a tax collected on imports and some exports by a country’s customs authorities

Question 13

Budget deficit

Answer 13

occurs when government spending is greater than tax revenues, therefore there is a negative balance

Question 14

Budget surplus

Answer 14

occurs when tax revenues is greater than government spending, therefore there is a positive balance

Question 15

Average tax rate formula

Answer 15

Average tax rate = total taxes paid / total income

Question 16

Marginal tax rate

Answer 16

the extra taxes paid on an additional pound of income

Question 17

Lump sum taxes

Answer 17

a fixed amount of tax paid by everyone

Question 18

What are the principles of taxation?

Answer 18

The benefits principle
i. People should pay taxes based on the benefits they receive from government services (a person who gets great benefit from a public good should pay more for it than a person who gets little benefit). For example, duties on petrol since in some countries revenue from petrol tax is used to build/maintain roads.

The ability-to-pay principle
i. Taxes should be levied on a person according to how well that person ca shoulder the burden (taxpayers with a greater ability to pay taxes should pay a larger amount)
a. However, ability-to-pay taxes are not straightforward because the question of how much more should the rich pay is opened. The three different systems that could be used is: proportional taxes, progressive taxes, and regressive taxes.