Chapter 8 Income Distribution. Part II

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1 Chapter 8 Income Distribution Part II

2 In a nutshell so far.. 1. Factors that determine wages Risk taking Ability Wealth 2. In Canada, poverty is usually defined in relation to the average Canadian income and expenditures on necessities 3. The poverty line, which depends on household type, is the income level below which a household is classified as poor 4. Poverty is mot prevalent among unattached (single) individuals (esp. women), single-parent families (esp those headed by women) and those under 25 and over 64 years old 5. Other possible measures based on absolute definition of poverty have been proposed by Canadian gov t but have yet to be officially adopted

3 The Canadian Welfare Society Canada has a mixed economy therefore it can be described as a welfare society Government plays a major role in attempting to ensure the well-being of its citizens How does the government address the specific goal of income equity? Transfer payments Income taxes

4 Transfer Payments 1. Transfer Payments a) Universality vs Means Testing b) Impact on Income Distribution 2. Taxes and Income Equity 3. Taxes and Income

5 Transfer Payments 1. Transfer Payments a) Universality vs Means Testing b) Impact on Income Distribution 2. Taxes and Income Equity 3. Taxes and Income

6 Universality vs Means Testing Principle of Universality Benefits apply to all individuals, no matter what their incomes Advantage: treating everyone in the same way; transfer payments are the same to every individual Drawback/Disadvantage: In order to provide significant help to those who need it the most, a large sum of money has to be paid to ALL recipients Means Testing Transfer payments vary according to recipient s income Advantage: benefit can be directed to those who need them most Poor households receive highest payments Disadvantage: Gov t may use means testing to limit spending by narrowing qualifications

7 Transfer Payments 1. Transfer Payments a) Universality vs Means Testing b) Impact on Income Distribution 2. Taxes and Income Equity 3. Taxes and Income

8 Impact on Income Distribution Government transfer payments to individual households are between 10-20% of household s income Many of them go to unattached individuals vs families The poorer % households get more than the richer 20% of households Payments have some impact on equalizing the distribution of income, but it is not perfect

9 Transfer Payments and Income Equity Transfer payments are now usually based on the principle of means testing rather than universality. Transfer payments are greatest as a percent of income for the poorest fifth of households, but the second-poorest fifth of households receives the largest share of these payments.

10 Transfer Payments and Income Equity (b) Average Transfer Payments Received (2006) Transfer Payments as a Percent of Total Income (2006) Share Received of Total Transfer Payments (2006) Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% $ % % Average of Total

11 Transfer Payments 1. Transfer Payments a) Universality vs Means Testing b) Impact on Income Distribution 2. Taxes and Income Equity 3. Taxes and Income

12 Principles of Taxation There are two main principles of taxation: benefits received (e.g. gasoline taxes for roadwork) ability to pay (e.g. personal income tax)

13 Benefits Received Definition: The principle applied to taxation, whereby taxes are geared to the benefits each taxpayer gains from government activity Government services are paid for in the same way that products are bought and sold in the private sector For example, carbon tax on gasoline is it mandatory? What is it s purpose? If you drive more, you will gas up more. Therefore you will be taxed more. Therefore when doing maintenance on roads, you will be contributing more to it.

14 Ability to Pay Definition: the principle applied to taxation, whereby taxes vary in proportion to a taxpayer s financial resources Difficult to measure this value Should incidence factors play a role in determining in paying amount of taxes? Do all individuals earning $40,000 have the same ability to pay taxes or should we take into account of how many children they need to support as well?

15 Transfer Payments 1. Transfer Payments a) Universality vs Means Testing b) Impact on Income Distribution 2. Taxes and Income Equity 3. Taxes and Income (Next Class)

16 Taxes and Income 1. Progressive Taxes 2. Regressive Taxes 3. Proportional Taxes

17 Progressive Taxes Definition: a tax that increases as a proportion of income as income increases This is what the Canadian System uses to calculate the tax owed from taxpayers In a nutshell: as you make more money, you pay more taxes

18 Sanpellegrino makes $30,000 in How much does she pay in BC taxes? Logan makes $50,000 in How much does he pay in BC taxes?

19 Sanpellegrino makes $30,000 in How much does she pay in BC taxes? Logan makes $50,000 in How much does he pay in BC taxes?

20

21 Regressive Taxes Definition: a tax that decreases as a proportion of income as income increases It is the OPPOSITE of progressive taxes In a nutshell: as you make more money, you pay less taxes Ie: If I make $10,000 a year, I pay 10% in taxes. If I make $20,000 a year, I pay 5% in taxes A regressive tax imposes a greater burden on the poor than on the rich

22 Regressive Taxes Sales Tax If sales tax is 7% for each person, a person with an income of $10,000 is a greater proportion of the overall income VS a person with an income of $100,000 Property Tax

23 Proportional Taxes Definition: tax that remains constant as a proportion of income for all incomes In a nutshell: as you make more money, you pay the same taxes Example: If I make $10,000, I pay 10% in taxes. If I make 1,000,000, I pay 10% in taxes. Application: Tithe of 10%

24 You Try! Identify the following taxes as progressive, regressive or proportional and explain your answers a) A tax on inherited wealth b) A 7% sales tax on all gods and services (with no accompanying tax credit) c) A personal income tax with a constant marginal tax rate (and no deductions from income) d) A tax on residential housing

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