1 Net Worth over $2.3 billion Copyright ACDC Leadership 2015 Income is the amount of money that a person receives in return for services, sale of goods, or profit from investments. Which of these ways of gaining income do you think is most profitable? Wealth is the net value of a person, the total value of assets minus liabilities. Income can lead to wealth, which can help to change the way that income is generated Less work, more investment (and thus, more income and faster growing wealth) Income Inequality In 2014, the average American family made $72,641. Everyone is obviously rich. **US Census Bureau Whats wrong with using the average? Averages reveal absolutely nothing about how income is distributed. The median American family earned just $51,939 What accounts for the difference between the average (mean) and the median?? 3 Copyright ACDC Leadership 2015 4 Copyright ACDC Leadership 2015 5 Copyright ACDC Leadership 2015 Ability Education and training Discrimination Preferences and risks Unequal distribution of wealth Market power Luck, connections, and misfortune 20-6 7 Copyright ACDC Leadership 2015 Rising income inequality since 1970 Causes of growing inequality? Greater demand for highly skilled workers Demographic changes International trade, immigration, and decline in unionism 20-8 9 Copyright ACDC Leadership 2015 Measuring Income Distribution Review the process: The government divides all income earning families into five equal groups (quintiles) from poorest to richest. Each groups represents 20% of the population. If there was perfect equality then 20% of the families should earn 20% of the income, 40% should earn 40% (and so on). The government compares how far the actual distribution is from perfect distribution then attempts to redistribute money fairly. 10 Copyright ACDC Leadership 2015 Measuring Income Distribution Lets distribute $100: Group #1 (Poorest 20%) Total of $5 (5% of total income) Group #2 Total of $10 (10% of total income) Group #3 Total of $15 (15% of total income) Group #4 Total of $25 (25% of total income) Group #5 (Richest 20%) Total of $45 (45% of total income) 11 Percent of Families Percent of Income Perfect Equality The Lorenz Curve 12 Copyright ACDC Leadership 2015 Percent of Families Percent of Income Perfect Equality Lorenz Curve (actual distribution) 13 The Lorenz Curve Percent of Families Percent of Income Perfect Equality Lorenz Curve (actual distribution) 14 The Lorenz Curve The size of the banana shows the degree of income inequality Copyright ACDC Leadership 2015 Percent of Families Percent of Income Perfect Equality Lorenz Curve (actual distribution) 15 The Lorenz Curve Area A Area B Gini Coefficient- Statistical measurement of income distribution. Area A divided by the sum of areas A and B (the size of the banana) Copyright ACDC Leadership 2015 Area A Area A + Area B The higher the ratio the more inequality. Gini Ratio by country Gini Ratio by country Gini Ratio by state Gini Ratio by state 19 Percent of Families Percent of Income Perfect Equality 21 TRANSFER PAYMENTS! Government transfer payments shift the Lorenz Curve toward more equality Is that good or bad? Copyright ACDC Leadership 2015 Pros Cons 23 Copyright ACDC Leadership 2015 Where does the government get the money for welfare? 24 What are Taxes? Why does the government tax? Two purposes: 1.Finance government operations. Public goods-highways, defense, employee wages Fund Programs- welfare, social security 2. Influence economic behavior of firms and individuals. Ex: Excise taxes on tobacco raises tax revenue and discourages the use of cigarettes. Taxes mandatory payments made to the government to cover costs of governing. 25 Three Types of Taxes 1. Progressive Taxes -takes a larger percent of income from high income groups (takes more from rich people). Ex: Current Federal Income Tax system 3. Regressive Taxes takes a larger percentage from low income groups (takes more from poor people). Ex: Sales tax; any consumption tax. 2. Proportional Taxes (flat rate) takes the same percent of income from all income groups. Ex: 20% flat income tax on all income groups 26 Federal Income Tax Debate This is our current system. Is it fair? The Progressive tax system is the most effective way to fight this market failure YOU ARE DONE WITH MICRO!!!! 28