Web Chapter B: Income Inequality and Poverty

Facts about Income Inequality Average household income $66,424 in 2008 Among the highest in the world Distribution by quintiles Income mobility People change quintiles Government redistribution Taxes and transfers

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Web Chapter BIncome Inequality and PovertyMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedFacts about Income InequalityAverage household income$66,424 in 2008 Among the highest in the worldDistribution by quintilesIncome mobilityPeople change quintilesGovernment redistributionTaxes and transfersWCB-*Facts about Income Inequality(1)PersonalIncome Category(2)Percentage of AllHouseholds in This CategoryUnder $10,000 7.3$10,000–$14,999 5.8$15,000–$24,999 11.9$25,000–$34,999 11.0$35,000–$49,999 14.1$50,000–$74,999 18.1$75,000–$99,999 11.5$100,000 and above 20.2100.0Source: Bureau of the Census, www.census.gov. Numbers do not add up to 100 percent due to rounding.WCB-*Facts about Income Inequality(1)Quintile(2)Percentage ofTotal IncomeLowest 20%Second 20%Third 20%Fourth 20%Highest 20%TotalDistribution by Quintiles3.48.614.623.250.3100.0Source: Bureau of the Census, www.census.gov(3)UpperIncome Limit$20,45338,55061,801100,000No LimitWCB-*Facts about Income InequalityLorenz Curve and Gini Ratio20406080100204060801000Perfect equalityLorenz curve(actual distribution)Complete inequalityABabcdefGini ratio =Area AArea A + Area BPercentage of HouseholdsPercentage of incomeWCB-*Facts about Income InequalityQuintile(1)Before Taxesand TransfersLowest 20%Second 20%Third 20%Fourth 20%Highest 20%Distribution by Quintiles0.97.014.524.253.5Source: Bureau of the Census, www.census.gov(2)After Taxesand Transfers4.210.516.424.144.8Effect of Government RedistributionWCB-*Facts about Income Inequality20406080100204060801000Lorenz curveBefore taxes andtransfersPercentage of householdsPercentage of incomeLorenz curveAfter taxes andtransfersImpact of Government Taxes and TransfersWCB-*Causes of Income InequalityAbilityEducation and trainingDiscriminationPreferences and risksUnequal distribution of wealthMarket powerLuck, connections, and misfortuneWCB-* Causes of Income InequalityWCB-*Income Inequality over TimeRising income inequality since 1970Causes of growing inequalityGreater demand for highly skilled workersDemographic changesInternational trade, immigration, and decline in unionismWCB-*Income Inequality over TimeQuintile19701975198019851990199520002009Lowest 20% 20%10.810.510. 20%17.417.116.916.315.915.214.814.6Fourth 20%24.524.824.924.624.023.323.023.2Highest 20%43.343.243.745.346.648.749.850.3Total100.0100.0100.0100.0100.0100.0100.0100.0Top 5%16.615.915.817.018.621.022.121.7Percentage of Total Before-Tax Income Received by Each One-Fifth and by the Top 5 Percent of HouseholdsWCB-*Equality versus EfficiencyThe case for equality Maximizing total utilityThe case for inequalityIncentives and efficiencyThe equality-efficiency trade-offWCB-*The Utility-Maximizing Distribution of IncomeAnderson’s MarginalUtility from IncomeBrooks’ MarginalUtility from Income00Marginal UtilityMarginal UtilityIncomeIncome$5000$5000$2500$7500MUBMUAaa’b’bUtility gain(entire blue area)Utility loss(entire red area)Equality versus EfficiencyWCB-*The Economics of PovertyDefinition of poverty in 2009Single person < $10,956Family of 4 < $21,954Family of 6 < $29,40543.6 million Americans14.3 percent in povertyWCB-*Incidence of PovertyPercentage in PovertyWCB-*Poverty TrendsPoverty rate trendsSignificant decline 1959–1969Stable in 11–13 percent range sinceRises with recession Measurement issuesArbitrary thresholdConsumption versus incomeWCB-*Poverty TrendsPoverty rate (percent)YearPoverty Rate Trends, 1959-2009WCB-*The U.S. Income-Maintenance SystemEntitlement programsAll those eligible receive aidSocial insurance programsSocial Security and MedicareUnemployment compensationPublic assistance programsWelfare WCB-*The U.S. Income-Maintenance SystemProgramBasis of EligibilitySource of FundsForm of AidExpendituresBeneficiariesSocial Insurance ProgramsSocial SecurityAge, disability, death of a parent or spouse; lifetime work earningsFederal payroll tax on employers and employeesCash$676 billion53 millionMedicareAge or disabilityFederal payroll tax on employers and employeesSubsidized health insurance$502 billion47 millionUnemployment CompensationUnemploymentState and federal payroll tax on employersCash$43 billion10 millionPublic Assistance ProgramsSSIAge or disability; incomeFederal revenuesCash$47 billion8 millionTANFCertain families with children; incomeFederal-state-local revenuesCash and services$15 billion5 millionSNAPIncomeFederal revenuesCash via EBT cards$65 billion40 millionMedicaidPersons eligible for TANF and SSI and medically indigentFederal-state-local revenuesStandardized medical services$297 billion59 millionEITCLow-wage working familiesFederal revenuesRefundable tax credit, cash$58 billion26 millionWCB-*Public Assistance ProgramsSupplemental Security Income (SSI)Temporary Assistance for Needy Families (TANF)Supplemental Nutrition Assistance Program (SNAP)MedicaidEarned income tax creditWCB-*