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3 - Public > 3 - Inequality, Poverty, Taxes and Transfers > Flashcards

3 - Inequality, Poverty, Taxes and Transfers Flashcards

1
Q

for what 2 reasons should governments intervene

A
  1. market failures
  2. redistribution = free market generates inequality - even if maximising efficiency
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2
Q

what is the efficiency and equity tradeoff?

A
  • taxes redistribute and reduce income inequality
  • but high taxes on the rich can reduce incentive to work and create a tradeoff between efficiency
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3
Q

what are the 2 streams that makeup income inequality

A

labour income inequality
capital income inequality

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4
Q

what are the reasons for L and K income inequality

A

L = abilities, effort, institutions
C = wealth differences, rates of return

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5
Q

where is inequality more concentrated in income or wealth

A

wealth

top 1% wealth holders = have 40% total wealth
top 1% incomes = 20% total National income

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6
Q

in past 50 years what is happening to capital shares

A

they are increasing in most countries

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7
Q

why is private wealth > public wealth

A
  • private wealth is increasing
  • public wealth is decreasing
  • because most govs run BD
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8
Q

where is inequality higher in income or in wealth distribution

A

income inequality < wealth inequality

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9
Q

how do we measure income inequality

A

using gini coefficient

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10
Q

what is the equation to find gini

A

gini = 2 * area between 45 degree line and Lorenz curve (L(p))

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11
Q

what is the gini coefficient
how do you find it

A
  • find A using trapezium area formula
  • use 0.5-A/0.5, or 2B
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12
Q

what is the Lorenz curve

A

Lorenz curves graph percentiles of the population against cumulative income or wealth of people at or below that percentile

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13
Q

what does L(52) mean

A

lorenz curve at the percentile 52

is the fraction of total income earned by individuals below percentile 52

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14
Q

what do gini = 0 and gini = 1 indicate in terms of equality

A

0 = perfect equality
1 = complete inequality (the top person holds all the income)

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15
Q

in the UK what is the cumulative distribution of UK fiscal income
- bottom 50%
- top 1%

A
  • bottom 50% = have a 11% share of total fiscal incom
  • top 1% = have 15%
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16
Q

what is the U shaped trend in inequality

A
  • income inequality increasing substantially since 1970
  • bottom 50% income has stagnated since 1980 even though average increase in GDPpc
  • gender gap decreased but remains at top
  • wealth and income inequality very high early 20th century
  • 1930-1950 = big decrease - most rich people hit the hardest
  • inequality rising since 1980
  • wealth inequality is not rising as fast as it was before
17
Q

what is UK current income inequality like compared to historic

A
  • UK is much more equal now than it was in the early 20th century
  • but compared to rest of EU is the most unequal
18
Q

what is the absolute poverty rate

A

fraction of population with disposable income below the poverty threshold = 1.90
- which is fixed in real terms
- $1.90/day

  • in UK fixed to 60% of median income in base year 2011
19
Q

what is relative poverty rate

A

fraction of population with disposable income below poverty threshold
- which is fixed relative to median
- EU = 60% of median average income

uk
- below 60% of the median in that year

20
Q

what is the difference between relative and absolute poverty measures

A

relative = captures inequality - as average incomes increase so does the threshold

absolute = captures growth and inequality - threshold stays the same regardless of increase in incomes

21
Q

what is the global poverty trend

A

decreasing

22
Q

how does relative poverty depend on income

A

when median income increases - relative poverty decreases
when median income decreases - relative poverty increases = more people will fall below the threshold

23
Q

how is absolute and relative poverty changing in UK and US

A

UK
* absolute poverty fallen substantially
* relative poverty increased and remained constant
USA
* absolute poverty hasnt fallen even though huge economic growth

24
Q

what has happened with relative and absolute poverty for UK in recent years

A
  • absolute = fell by 1 pp
  • relative = fell by more than absolute - 1.7 pp (but this is because median income has fallen because of covid)
25
Q

what is intergenerational income mobility

A

the degree that a persons position in income distribution changes from generation to generation

  • do childrens success depend on their parental income
  • can parents income predict their childs future income
26
Q

what does income inequality have anything to do with intergenerational income mobility

A
  • want to test what the probability of a child moving from low income to high income (does their success depend on their parents)
  • low mobility = less likely to differ from parents income rank
27
Q

what is the relationship between income inequality and income mobility
Chetty 2014

A
  • places with low income inequality tend to have high mobility
  • high mobility =
  • low segregation
  • good schools
  • high social capital
  • high family stability
28
Q

Chetty 2014

A

intergenerational mobility

29
Q

what does Chetty 2014 test

A

what is the average income rank of children by income rank of parents

30
Q

what does Chetty 2014 find

A
  • US has less mobility than EU countries
  • heterogeneity in mobility across cities in US (south east is lowest)
  • high mobility = better schools, low segregation, high family stability
  • racial disparity in mobility
  • US = 7.5% probability that child born to parents in bottom 1/5th of income distribution reaches the top 5th –> a lot less than Canada
31
Q

Carneiro 2022

A

intergenerational income mobility in England

32
Q

what does Carneiro 2022 test

A

estimates absolute income mobility for kids 1980s england

33
Q

what does Carneiro 2022 find

A
  • North = lowest mobility
  • south = highest - low income children can move up higher in income distribution
  • children from low income families who grew up in lowest mobility areas (north) end up 15 percentiles lower at age 28 compared to those from the highest mobility areas
  • educational achievements across areas explain a lot of the variation
  • education policy is key to equalise opportunities of children from low-income families
34
Q

what does higher intergenerational mobility indicate
1 and 0

A

1 = high
* no correlation between parents income rank and childrens rank
* childrens income not dependent on their parents

0 = low
* parents income rank perfectly predicts childrens rank

35
Q

how does intergenerational mobility graph work 0 and 1

A

0 = 45 degree line
- perfectly predicts

1 = flat line
- no correlation at all

36
Q

what is a neutral tax/transfer system

A

the tax is proportional for both poor and rich

37
Q

what is progressive tax system

A
  • inequality in y < inequality in z
  • tax is redistributive
  • the more you earn the more you need to pay
  • rich pay higher proportion of their income towards taxes
38
Q

what is regressive tax system

A
  • inequality in Y > inequality in Z
  • tax rate decreases as tax payers income increases
39
Q

how are taxes in UK progressive

A
  • average tax rate increases with income
  • at each income there is a range of average tax rates
  • people fax different statutory rates depending on the form of income (self employed/employed)

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