Deck 28: Income Inequality and Poverty

Question 1

"Means-tested transfer payments reduce the current poverty rate. However, they also create an incentive structure that discourages self-sufficiency and self-improvement. Thus, they tend to increase the future poverty rate. Welfare programs essentially purchase a lower poverty rate today in exchange for a higher poverty rate in the future." Evaluate this statement.

Answer 1

Transfer payment is a payment which a person receives from government (for being poor!). This payment is given in order to reduce poverty. However, this transfer payment reduces self-sufficiency and self-improvement which reduces the incentives of the poor to work more and earn income in future. So, it can be said that however this method helps to reduce poverty in the current period, it leads to increased poverty and more burden on the government in future.

Question 2

Was the poverty rate increasing or decreasing prior to the War on Poverty initiated by the Johnson administration? As income-transfer programs accompanying the War on Poverty increased beginning in the latter half of the 1960s, what happened to the poverty rate?

Answer 2

Poverty rate increases in the beginning of war as people have less incentive to earn because they feel that whatever they earn will be lost in war. Before the war on poverty was initiated by the administration, poverty was increasing and was at a staggering 19% level. This led the government to start a war on poverty in order to reduce the high poverty rate in the economy. After the war, the poverty rates dropped down to their minimum and the poor were better off after this.

Question 3

Suppose one family has $100,000 whereas another has only $20,000. Is this outcome fair? What is your initial reaction? Compare and contrast your views depending on the following:
a. The family with the higher income has both a husband and wife working, whereas the other family has chosen for the wife to remain home with the children rather than work in the labor force.
b. The family with the higher income is headed by a person who completed a college degree, whereas the other family is headed by someone who dropped out of high school.
c. The family with the higher income derived most of its income from the farm subsidy program.
d. The family with the higher income received it as an inheritance from parents who just died.

Answer 3

With one family earning $100,000 while other earning $20,000; the outcome is definitely not fair. However, it all depends on the skills and other reasons behind this difference. It can happen that the family earning $100,000 might be more skilled than the family earning $20,000 only. However, at a first glance, this appears to be a case of very high inequality.
a. Despite of working of both couples income inequality arises because average of that salary should also not equal to the salary of individual who is getting paid. His salary is very less than the average of the high paid family which is adverse situation for an economy as it will as usual create inequality.
b. Education qualification will create some inequality in salary so in this regard in equality arises because higher employee is highly or more qualified than the low earning family.
c. In case subsidy income it's not beneficial for government to give subsidiary to agriculture farmers and as a result of that if they get subsidy and dint utilize that so that becomes their income which further creates reason for inequality.
d. If family received inheritance from parents who died is not treated as an earnable income and also it's not considered as a part of GDP or national income. So, this may be excluded In order to calculate in equality.

Question 4

Do you think the current distribution of income in the United States is too unequal? Why or why not? What criteria do you think should be used to judge the fairness of the distribution of income? Is the final outcome more important than the process that generates the income?

Question 5

Is annual money income a good measure of economic status? Is a family with an $80,000 annual income able to purchase twice the quantity of goods and services as a family with $40,000 of annual income? Is the standard of living of the $80,000 family twice as high as that of the $40,000 family? Discuss.

Question 6

What is income mobility? If there is substantial income mobility in a society, how does this influence the importance of income distribution data?

Question 7

Do individuals have a property right to income they acquire from market transactions? Is it a proper function of government to tax some people in order to provide benefits to others? Why or why not? Discuss.

Question 8

Because income transfers to the poor typically increase the implicit marginal tax rate they confront, does a $1,000 transfer payment necessarily increase the income of poor recipients by $1,000? Why or why not?

Question 9

What groups are overrepresented among those with relatively low incomes? Do the poor in the United States generally stay poor? Why or why not?

Question 10

Some people argue that taxes exert little effect on people's incentive to earn income. Suppose you were required to pay a tax rate of 50 percent on all money income you earn while in school. Would this affect your employment? How might you minimize the personal effects of this tax?

Question 11

Large income transfers are targeted toward the elderly, farmers, and the unemployed, regardless of their economic condition. Why do you think this is so? Do you think there would be less income inequality if the government levied higher taxes in order to make larger income transfers? Why or why not?