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CH20 Income Inequality and poverty

Data on distribution of income show a wide disparity in our society. The richest fifth of families earns about ten times as much income as the poorest fifth.

Because in-kind transfers, the economic life cycle, transitory income, and economic mobility are so important for understanding variation in income, it is difficult to gauge the degree of inequality in our society using data n the distribution of income in a single year. When these other factors are taken into account, they tend to suggest that economic well-being is more equally distributed than is annual income.

Political philosophers differ in their views about the role of government in altering the distribution of income. Utilitarians would choose the distribution of income to maximize the sum of utility of everyone in society.

Liberals would determine the distribution of income as if we were behind a "veil of ignorance: that prevented us from knowing our own stations in life.

Libertarians would have the government enforce individual rights to ensure a fair process but then not be concerned about inequality in the resulting distribution of income.

Various policies aim to help the poor-minimum wage laws, welfare, negative income taxes, and in-kind transfers. Although each of these policies helps some families escape poverty, they also have unintended side effects. Because financial assistance declines as income rises, the poor often face effective marginal tax rates that are very high. Such high effective tax rates discourage poor families from escaping poverty on their own.

CH 20 key terms: poverty rate: the percentage of the population whose family income falls below an absolute level called the poverty line poverty line: an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty. In-kind transfers: transfers to the poor given in the form of goods and services rather than cash. life cycle: the regular pattern of income variation over a person's life permanent income: a person's normal income utilitarianism: the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society. utility: a measure of happiness or satisfaction liberalism: the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind a "veil of ignorance" maximin criterion: the claim that the government should aim to maximize the well-being of the worst-off person in society. social insurance: government policy aimed at protecting people at against the risk of adverse events. libertarianism: the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income welfare: governments programs that supplement the incomes of the needy negative income tax: a tax system that collects revenue from high income households and gives transfers to low income households.

Sources: http://www.pappastax.com/wp-content/uploads/2009/03/tax_web.jpg http://www.neweurasia.net/wp-content/uploads/2010/01/charity-706285.jpg http://www.american.com/graphics/2007/october/Income%20Inequality.jpg

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