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5.2.3 Income Redistribution

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Up to this point we assumed that there is full information in the market. We are now ready to relax this assumption as we introduce the concepts of moral hazard and adverse selection. We learn that asymmetric information may lead to market failure and we discuss some remedies. The last segment in the course is a reminder that besides efficiency, equity is also a criteria we all care about. A short introduction will explore how economist measure poverty and inequality.

Perfect markets achieve efficiency: maximizing total surplus generated. But real markets are imperfect. In this course we will explore a set of market imperfections to understand why they fail and to explore possible remedies including as antitrust policy, regulation, government intervention. Examples are taken from everyday life, from goods and services that we all purchase and use. We will apply the theory to current events and policy debates through weekly exercises. These will empower you to be an educated, critical thinker who can understand, analyze and evaluate market outcomes.

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Externality, Economics, Microeconomics, Market (Economics)

教学方

Rebecca Stein
Senior Lecturer

脚本

So I left you with a question of why we don't send checks to

the children while we do send checks to those over 65.

So why are we alleviating poverty among the elderly and not among children?

Well, this is, partly because, every time the government steps in and

tries to alleviate poverty, it will be changing incentives.

So lets think of ways that the government,

at least here in the United States, redistributes income.

So how do we reduce income inequality?

How do we reduce poverty?

Well, the three major tools that we use.

First of all, is through our taxation system.

So here in the United States there are many forms of taxation, but

the federal income tax, the tax that's collected by the United States of America,

is what we call a progressive tax.

It collects a bigger share of the income

of the rich in taxes than the income of the poor.

So if you take more from the rich than you do from the poor,

you redistributing income.

Another way to alleviate poverty is through income maintenance program.

And this basically means sending checks to those who don't have enough.

And in the United States, we are pretty good at doing this for

people over the age of 65.

Another way of alleviating poverty is by subsidizing services.

Remember, we said that, sort of in the back of our mind,

the way we want to define poverty, is we want to make sure that people

are not poor when they have enough income to buy the food,

and the clothing, and the shelter, and the other services that they need.

Well, maybe one way of making them not poor is rather than giving them money,

giving them some free services.

And indeed here in the United States we do give some free services,

for example, education in the United States is free up to the age of 18.

So that is a subsidized, in this case completely subsidized, service.

Another service that's given for free is health care.

So here in the United States we have a very, very convoluted and

complicated health care system where most people have to buy their

insurance either privately or through the work place.

But we do give free healthcare for those over 65 through a system called Medicare

and we also give healthcare to those very poor to a system called Medicaid and

we actually also give it to children to a program called S chip or

run to the States, not all children but children who are poor or close to poverty.

Piece of these are examples, again, of subsidized services that are there

to help people not be poor despite the fact that their income is low.

So I've mentioned here that here in

the United States we have a progressive income tax.

The federal income tax system is built in such a way

that the average tax rate rises with income.

I also mentioned that here in the United States,

we have many taxes, not just the federal income tax.

And I just want to point out that many of the taxes that we have,

maybe not our income tax, but many other taxes, are regressive.

And a regressive tax is a tax where the average tax rate falls with income.

In other words when you're poor

you're paying a higher share of your income in taxes than when you're rich.

Let me give you just a few examples of regressive taxes here in

the United States.

All taxes basically on necessities, regressive.

So for example, a sales tax is probably going to be regressive.

A sales tax is a tax on anything that you buy, and

poor people's and more of their money.

And as longs as they spend their money, they're going to pay a tax on this.

So a sales tax is going to be regressive.

Here, in Pennsylvania, we try to make our sales tax progressive

by not taxing deep necessities like food and clothing.

So we take this regressive tax and

we turn it into progressive by saying food and clothing will not be taxed.

Another example of a regressive tax, any per unit tax on alcohol or

cigarettes, soda taxes, these are all regressive taxes.

It is not that the poor smoke more or drink more, they actually don't,

but as a share of the income, they spend more of their income on things like taxes,

on things like liquor, on things like soda.

So if we have a tax that is a tax on liquor, a tax on cigarettes, or

a tax on soda, this tax will fall more on the poor

as a percentage of the income, than it will on the rich.

We can also have a proportional income tax, which is an income tax or

in general a tax where the average tax rate is constant.

So if you had to pay the same percentage of your income in that tax,

it would be a proportional tax.

So for example, here in the United States, the Social Security tax,

was maybe, designed to be a proportional tax,

in that you pay a certain percentage of your income in Social Security taxes.

But I just want to point out, that this proportional tax,

was actually turned into a regressive tax.

And that's by putting a ceiling

on the percentage of your income that is subject to this tax rate.

So here in the United States, you pay a Social Security tax up to a certain

ceiling, I think it's about $100,000 currently, and any income past $100,000,

you don't pay Social Security tax on that work income.

So what does that mean?

That means the poor people are paying more tax than the rich people are so

it is no ;longer proportional, it would be regressive.

So I'd like you to think again about the taxes that you pay and

the taxes that exist in your country and think about whether or

not these taxes are progressive, regressive or proportional.

If they are progressive, they will increase equality.

They will move the after-tax Lorenz curve closer to the 45 degree line.

They will reduce the gini coefficient.

A regressive tax, on the other hand, it will move your Lorenz curve further

away from the 45 degree line and will increase the post tax gini coefficient.

And maybe post your feelings about your taxes on our website, on the forums.

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