Deck 28: Income Inequality and Poverty

Question 1

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?

Answer 1

Income structure of every country depends on the skills and experience of the people who are working. In US there are different people with different skills, background, and experience. Some are highly qualified while others are less qualified. Since income depends completely on knowledge of the person, people with more skill set and knowledge earn higher salary than others. So this reason creates inequality in income among different persons.
Fairness of income distribution should be judged on the basis of the skills the person possesses. If people with similar skills get different wages because of some sort of discrimination say color or region, then the income distribution is based as unfair.
No, the Final outcome is not important because what matters the most in an economy is the fairness of the process. Even if the final outcome if the process is a very significant number but the process is unfair or unjust, the result would not make sense. So, it is important that both the process and the outcome be fair in their results.

Question 2

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.

Answer 2

Annual money income is not a good way to measure economic status. As annual money income doesn't state the true picture of an economy, it doesn't mean that if annual income is more, then the economy is doing well. There are other very important things which affect the status of the economy.
For a Person with $80K income, there is no doubt that his income is twice that of a family earning $40k but it's not necessary that they will be able to purchase more amount of goods purchased by a family whose income is $40k because there are other factors which affect consumption and also units like price, quality, taste and preferences and area etc. everything being equal, the standard of living would be more for the person with $80K income, otherwise it can be even same or less. It all depends on the area and the tastes of the person.

Question 3

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

Answer 3

Income mobility implies getting transferred to a different income group say from lower to middle and from middle to high income group. This leads to economic growth and reduces income inequality and reduces poverty in the society. However, such a move can also affect the income distribution negatively. Some people moving faster into higher groups and others being at their original levels would result in a wide disparity in incomes of the people.

Question 4

Consider a table such as Exhibit 3 in which the family income of parents is grouped by quintiles down the first column, and that of their offspring is grouped by quintiles across the other columns. If there were no intergenerational mobility in this country, what pattern of numbers would appear in the table? If the nation had attained complete equality of opportunity, what pattern of numbers would emerge? Explain.

Question 5

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 6

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 7

Sue is a single parent with two children. She is considering a part-time job that pays $800 per month. She is currently drawing monthly cash benefits of $300, food stamp benefits of $100, and Medicaid benefits valued at $80. If she accepts the job, she will be liable for employment taxes of $56 per month and lose all transfer benefits. What is Sue's implicit marginal tax rate for this job?

Question 8

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 9

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 10

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?

Question 11

The outcome of a state lottery game is certainly a very unequal distribution of the prize income. Some players are made very rich, whereas others lose their money. Using this example, discuss whether the fairness of the process or the fairness of the outcome is more important, and how they differ.

Question 12

"Means-tested transfer payments reduce the current poverty rate. However, they also create an incentive structure that discourages self-sufficiency and selfimprovement. 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.

Question 13

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?

Question 14

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.