Public Finance and Income ReDistribution

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Public Finance and Income (Re)Distribution

• Class 8

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A significant portion of economic activity is
carried out by the public sector

• Public Finance
• Study of government revenues and expenditures
• Focuses on
• Expenditures things the government buys
• Transfer payments income transfers from one
  individual or organization to another
• We are going to focus on transfer payments
• Why do we need to have any transfer payments?
• Are transfer payments fair?
• What kind of transfer payments?

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We certainly would not be talking about transfer
payments if everyone made the same amount of money

• Income Distribution
• How is the total income spread out among
  citizens?
• If income was perfectly evenly distributed, we
  would all have the same income
• In the US, that has historically not been the
  case
• Top Decile Income Share, 1917-2004

Pikkety-Saez 2006 Data
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We can measure income distribution using the
Lorenz Curve and Gini Coefficient

• Measuring Income Inequality

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Concern about income inequality focuses on those
living below the poverty line and the middle class

• Poverty
• Extremely hard to measure
• Last year, the pre-tax income cutoff for a couple
  living with two children was 19,806
• Nationally, 12.7 of households live under the
  poverty line
• Concept of relative deprivation

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Is a minimum wage a good way to reduce poverty?

• Minimum Wage
• Bad theoretically (Why?)
• But empirically, there does not seem to be much
  affect
• Clinton proposal link min. wage increases with
  congressional salaries

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Income redistribution is one way to resolve the
inequality, while helping to alleviate poverty

• Redistribution
• Taxes
• Arguments against and for
• Freedom
• Efficiency
• Incentives (supply-side, voo-doo economics)
• Equity
• Decency
• Diminishing Marginal Returns

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In the US, there is some income redistribution

• Taxes and Expenditures
• Progressive those with higher incomes pay a
  greater percentage of their income
• Income tax
• Estate (death) tax
• Regressive those with lower incomes pay a
  greater percentage of their income
• National Sales tax?
• Distribution through expenditures
• Social security
• Medicaid/Medicare

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• title
• Bullet

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Redistributions occur at local and federal level

• Voting With Your Feet
• When local governments tax, families can choose
  what kind of community they want to live in.
• School districts
• Pros and Cons of local taxation
• More power to the people
• Greater corruption/incompetence at local levels
• Certain programs must be national in scope

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Determining the type of tax (progressive or
regressive) is not easy

• Tax Incidence
• Sometimes, we can shift taxes to others
• If Phillip Morris is levied a 1 tax on
  cigarettes
• Reduce supply
• Prices go up by 0.80
• 80 of the tax has been shifted to consumers
• Wealthier people seem to be better at lowering
  their effective tax rate

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For the rest of our lives, Congress will disagree
about income redistribution

• Recent Debates
• Estate Tax
• Created in 1916
• A one-time levy on inherited wealth, to keep the
  US from having hereditary aristocracy
• Disincentives to invest in building an empire
• Double taxation
• Encourages charitable giving
• Source of significant revenue
• What happened
• June 2006, repeal passed the House, Dems
  filibustered in the Senate (57-41 vote)
• On hold till after midterms

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Recent Debates

• National Sales Tax
• Tend to be regressive (Why?)
• Abolish the IRS!
• FairTax Legislation
• 23 tax on retail goods and services
• Revenue Neutral?
• Dead in the water politically, BUT
• Has attracted more cosponsors than any other tax
  reform bill in the House

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Next Class

• Introduction to MACROECONOMICS!
• Changes to reading schedule