PROBLEMS AND APPLICATIONS

1. Table 2 shows that income inequality in the United States has increased since 1970, Some factors contributing to this increase were discussed in Chapter 19. What are they?

2. Table 4 shows that the percentage of children in families with income below the poverty line far exceeds the percentage of the elderly in such families. How might the allocation of government money across different social programs have contributed to this phenomenon? (Hint: See Chapter 12.)

3. Economists often view life cycle variation in income as one form of transitory variation in income around people’s lifetime, or permanent, income. In this sense, how does your current income compare to your permanent income? Do you think your current income accurately reflects your standard of living?

4. The chapter discusses the importance of economic mobility.

a. What policies might the government pursue to increase economic mobility within a generation?

b. What policies might the government pursue to increase economic mobility across generations?

c. Do you think we should reduce spending on current welfare programs to increase spending on programs that enhance economic mobility? What are some of the advantages and disadvantages of doing so?

5. Consider two communities. In one community, ten families have incomes of $100,000 each and ten farmlies have incomes of $20,000 each. In the other community, ten families have incomes of $200,000 each and ten families have incomes of $22,000 each.

a. In which. community is the distribution of income more unequal? In which community is the problem of poverty likely to be worse?

b. Which distribution of income would Rawls prefer? Explain.

c. Which distribution of income do you prefer? Explain.

d. Why might someone have the opposite preference?

6. The chapter uses the analogy of a “leaky bucket” to explain one constraint on the redistribution of income.

a. What elements of the U.S. system for redistributing income create the leaks in the bucket? Be specific.

b. Do you think that Republicans or Democrats generally believe that the bucket used for
redistributing income is leakier? How does that belief affect their views about the amount of income redistribution that the government should undertake?

7. Suppose there are two possible income distributions in a society of ten people. In the first distribution, nine people have incomes of $30,000 and one person has an income of $10,000. In the second distribution, all ten people have incomes of $25,000.

a. If the society had the first income distribution, what would be the utilitarian argument for redistributing income?

b. Which income distribution would Rawls consider more equitable? Explain.

c. Which income distribution would Nozick consider more equitable? Explain.

8. The poverty rate would be substantially lower if the market value of in-kind transfers were added to family income. The government spends more money on Medicaid than on any other in-kind transfer, with expenditures per recipient family amounting to roughly $5,000 annually.

a. If the government gave each recipient family a check for this amount instead of enrolling them in the Medicaid program, do you think that most of these families would spend that much to purchase health insurance? (Recall that the poverty line is below S15,000 for a family off our.) Why?

b. How does your answer to part (a) affect your view about whether we should determine the poverty rate by valuing in-kind transfers at the price the government pays for them? Explain.

c. How does your answer to part (a) affect your view about whether we should provide assistance to the poor in the form of cash transfers or in-kind transfers? Explain.

9. Consider two’ of the income security programs in the United States: Temporary Assistance for Needy Families (TANF) and the Earned Income Tax Credit (EITC).

a. When a woman with children and very low income earns an extra dollar, she receives less in TANF benefits. What do you think is the effect of this feature of TANF on the labor supply of low-income women? Explain.

b. The EITC provides greater benefits as low-income workers earn more income (up to a point). What’ do you think is the effect of this program on the labor supply of law-income individuals? Explain.

c. What are the disadvantages of eliminating TANF and allocating the savings to the EITC? lO. Suppose that a family’s tax liability equaled its income multiplied by 0.40, minus S7,500. Under this system. some families would pay taxes to the government, and some families would receive money from the government through active income tax.

a. Consider families with pay-tax incomes of SO, SI0,000, $20,000, $30,000, and $40,000. Make a table showing pre-tax income, taxes paid to the government or money received from the government, and after-tax income for each family.

b. What is the marginal tax rate in this system? (See Chapter 1 if you need to review the definition of marginal tax rate.) What is the maximum amount of income at which a family receives income from the government?

c. Now suppose that the tax schedule is changed so that a family’S tax liability- equals its income multiplied by 0.60, minus $7,500. What is the marginal tax rate in this new-system? What is the maximum amount of income at which a family receives money from the government?

d. What is the main advantage of each of the tax schedules discussed here?

11. John and Jeremy are utilitarians. John believes that labor supply is highly elastic, whereas Jeremy believes that labor supply is quite inelastic. How do you suppose their views .about income redistribution differ?

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