Maclachlan, Microeconomics, Spring 2005 Income Inequality and Poverty Week 14

Table 1 The Distribution of Income in the United States: 2000 Copyright©2004 South-Western

Table 2 Income Inequality in the United States Copyright©2004 South-Western

Maclachlan, Microeconomics, Spring 2005 Effect of Women’s Movement 32% of women held jobs outside the home in the 1950s versus 54% in the 1990s What is the effect on household income distribution?

Maclachlan, Microeconomics, Spring 2005 Income Equality around the World

Maclachlan, Microeconomics, Spring 2005 Poverty Rate Set by government at roughly three times the cost of providing an adequate diet. In 2000 the median family had an income of $50,890 and the poverty line for a family of four was $17, 603. The poverty rate was 11.3%

Figure 1 The Poverty Rate Copyright©2003 Southwestern/Thomson Learning Percent of the Population below Poverty Line Poverty rate

Table 4 Who Is Poor? Copyright©2004 South-Western

Maclachlan, Microeconomics, Spring 2005 Problems Measuring Inequality In kind transfers. Economic life cycle. Transitory versus Permanent Income. In a ten year period one in four families falls below the poverty line yet fewer than 3% of families are poor for eight or more years.

Maclachlan, Microeconomics, Spring 2005 Policies to Reduce Poverty Minimum wage laws. Welfare (TANF, SSI). In-kind transfers.

Maclachlan, Microeconomics, Spring 2005 Incentive based scheme Negative income tax (say pay 33% of income minus $10,000)

Maclachlan, Microeconomics, Spring 2005 Not one cent to the IRS on the first $36,000. Anything over that would be taxed at a flat, fair 17%. The flat tax would be simple. You could fill it out on a postcard. It would be honest. It would eliminate the principal source of political corruption in Washington. It would be fair. Millions of people would be off the federal income tax rolls. There would be no tax on Social Security. No tax on pensions. No tax on personal savings. It would zero out capital gains taxes. It would set off a boom by letting people keep more of what they earn and by lowering barriers to risk taking.

Maclachlan, Microeconomics, Spring 2005 Start by scrapping the tax code. Don't fiddle with it. Throw it out. Put as many IRS bureaucrats as possible into job retraining. Replace it with a flat tax that is a tax cut -- a pro-growth, pro- family tax cut that lowers tax rates to 17 per cent across the board and expands exemptions for individuals and children so that a family of four would pay no taxes on the first $36,000 of income. Not one cent to the IRS on the first $36,000 of income. Anything more than that would be taxed at a flat, fair 17 per cent. This would mean that families living at the median household income would pay practically nothing to Uncle Sam in taxes. The flat tax would be so simple, you could fill it out on a post card. A post card that would say, in effect, having a wonderful time; glad most of my money is here.

Maclachlan, Microeconomics, Spring 2005 It would be honest. It would eliminate the principal source of political corruption in Washington -- trading loopholes for campaign cash. It would be fair. Millions of people would be off the tax rolls. There would be no tax on Social Security. No tax on pensions. No tax on personal savings. For the sake of small businesses and entrepreneurs, it would zero out capital gains. For Mom-and-Pop stores, and everyone else, it would eliminate estate taxes.

Maclachlan, Microeconomics, Spring 2005 Tax return on a postcard The Steve Forbes Flat Tax Form 1.Wages & Salary 2.Number of adults in family 3.Number of children in family 4.Deductions for adults (multiply line 2 by $13,000) 5.Deductions for children (multiply line 3 by $5,000) 6.Total deductions(line 4 plus line 5) 7.Taxable income (line 1 minus line 6) 8.Tax (multiply line 7 by 17%)