Economics 001 Principles of Microeconomics

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1 Economics 001 Principles of Microeconomics Professor Arik Levinson Lecture 23 poverty and inequality redistribution Lorenz curves leaky buckets Poverty Lyndon Johnson's "War on Poverty" Thrifty food plan (TFP) Official definition of poverty (3xTFP) the "poverty line" families of 4 w/ < $3169 in 1964 $22,350 in 2011 Poverty today (2010) Family size 2011 Poverty Line 1 $10,890 2 $14,710 3 $18,530 4 $22,350 5 $26,110 6 $29,990 7 $33,810 8 $37, percent, up from 14.3% in 2009, 12.5 % in million, up from 37.3 million in 2007 non-hispanic Whites 9.9 percent Asians 12.1 percent Hispanics 26.6 percent Blacks 27.4 percent children under 18 years old 22.0 percent people 65 years and over 9.0 percent For each additional person, add $3,820 Inequality 46.2 million in 201 Mean family by quintile (2003 dollars) Year Lowest Second Middle Fourth Highest ,570 27,795 40,189 54,212 93, ,160 27,821 41,366 56,639 95, ,556 29,509 44,579 61, , % in ,831 29,443 45,458 65, , ,420 31,300 48,206 69, , ,503 31,111 48,710 71, , ,085 34,491 54,207 79, , ,871 32,896 53,016 79, ,322 1

2 Inequality Annual growth rate of real across the family distribution: 1947 to 1973 versus 1973 to 2005 Mean family by quintile (percent) Year Lowest Second Middle Fourth Highest % 12.2% 17.6% 23.8% 40.9% % 11.9% 17.6% 24.2% 40.7% % 11.6% 17.6% 24.4% 41.1% % 11.0% 16.9% 24.3% 43.1% % 10.8% 16.6% 23.8% 44.3% % 10.1% 15.8% 23.2% 46.5% % 9.8% 15.4% 22.7% 47.7% % 9.6% 15.5% 23.3% 47.6% Katz and Goldin, VoxEu 2009 Inequality Lorenz curves % of or wealth Family wealth quintile wealth % of families % of or wealth 100 Gini coefficient = A/(A+B) Gini Coeff For US Household Income A B % of families 2

3 The Distribution of Income by Selected Family Characteristics in 1994 Sources of household inequality, 2005 Equal Pay? University of Virginia, 2012 Full-time female professors are paid 87 percent of the average salary of a full-time male professor. USC, 2012 Female faculty at USC are paid less than male faculty by about six to 11 percent depending on their professor level dailytrojan.com/2012/04/17/female-professors-earn less-than-males/ Income redistribution (1) Progressive richer people pay a higher percentage of their s in (2) Income maintenance (cash transfers) Social Security Unemployment insurance TANF (formerly AFDC) (3) Transfers in kind Medicaid, Food Stamps, housing Aside: The Fundamental Principles of Tax Reform 1) Deadweight loss increases with the square of the tax rate. tax P DWL 2) Lower rates on a broader base raises the same revenue with smaller DWL. Q 3

4 Excludes employer contributions to health, retirement, parking; taxpreferred savings; imputed rent; interest on state and local bonds; household work. Ordinary : 10%, 15%, 25%, 28%, 33%, 35%. Student loan payments, business and moving expenses, alimony. Phase out with. Child, EITC, HOPE and Lifetime Learning, electric vehicles, foreign, adoption, IRA contribution, D.C. Firsttime homebuyer, etc. Capital Gains: 15% Phase out with. Charity contributions, home mortgage interest, state and local. govinfo.library.unt.edu/taxreformpanel/final-report/index.html 2011 US Federal Personal Income Tax Brackets Tax Rate Single Married Filing Jointly 10% Not over $8,500 Not over $17,000 15% $8,500 - $34,500 $17,000 - $69,000 25% $34,500 - $83,600 $69,000 - $139,350 28% $83,600 - $174,400 $139,350 - $212,300 33% $174,400 - $379,150 $212,300 - $379,150 35% Over $379,150 Over $379,150 Exemptions $3,700 per person $3,700 per person Standard Deductions $5,800 $11,600 Tax Policy Center Number of Returns 140,494,127 Who is not paying? 46% of US households owed no federal tax in % paid no federal or payroll. Most of those are old people; most of the rest have s < $20k. Adjusted gross per return $ 54,283 Taxable per return $ 34,600 Tax per return $ 6,164 Percent of AGI 11% Percent of TI 18% 4

5 Scale of redistribution lowest 20% of population earns 4% of market 13% after adding transfers and subtracting highest 20% of population earns 49% of market 31% after adding transfers and subtracting Cumulative % of & wealth Income Redistribution Distribution after and benefits Line of equality Market distribution Redistribution Cumulative % of families Leaky buckets: equity v. efficiency Income redistribution diminishes efficiency Size of the "pie" depends on how it is divided The welfare trap after and transfers (1) administrative costs (2) efficiency / incentive costs transfers 0 Market Yelowitz and Toikka, 2005 epionline.org/studies/yelowitz_ pdf Yelowitz and Toikka, gatton.uky.edu/faculty/yelowitz/yelowitz-povtrap2.pdf 5

6 Traditional Programs A Negative Income Tax Income after redistribution G Welfare trap No distribution Benefits Taxes Current programs and Current redistribution arrangements Income after redistribution G No distribution Break-even A negative tax Negative tax 0 A C Market Income 0 B Market Income Comparing Traditional Programs and a Negative Income Tax Income after redistribution G Higher benefits 0 B A negative No distribution tax Current programs and Higher Break-even Market Income Negative tax 6