Regarding the income distribution in

the United States, we have:

1. Too much inequality
2. Just the right amount of
inequality
3. Not enough inequality
4. No opinion/don’t know

0 of 30
 Which do you prefer?

1. Every household earns

exactly $40,000
2. 10% of the households
each earns $40,000, the
next 40% each earns
$45,000, the next 40%
earns $60,000, and the
richest 10% earns
$10,000,000.

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 Unit 9 - Distribution of Wealth
and Incomes
 United States Income Distribution

The United States Census Bureau measures

the percentage of income each quintile
(poorest to richest) earns as part of the total
income.

A quintile is 20% of the total.

The table on the next slide provides the latest

data for 2009 households and compares this
with 2006 and 1979 data.
Microeconomics
 Unit 9 - Distribution of Wealth

and Incomes
Percentage Distribution of U.S. Households, by
Income Group, 2009, 2006 and 1979 (source: U.S. Census)
Mean Income Share of Income Share of Income Share of
Threshold( (upper Received in 2009 Received in 2006 Income
limit) of 2009 Received in
Households 1979
$20,453 (lowest 3.4% 3.4% 4.2%
quintile, appr. 23.4
mill. households)
$38,550 (second 8.6% 8.6% 10.3%
lowest quintile)
$61,801 (third quintile) 14.6% 14.5% 16.9%

$100,000 (fourth 23.2% 22.9% 24.7%

quintile)
Over $100,000 (top 50.3% 50.5% 44.0%
quintile)
Are the rich getting richer, and the
poor getting poorer?
1. Yes
2. No
3. It depends
4. Not sure
Unit 9 - Distribution of Wealth and Incomes

50.3%
44%

1979 4.2%
This Year 3.4%
Income distribution comparison by households
Unit 9 - Distribution of Wealth
and Incomes
 United States Income Distribution

In absolute and relative terms, the rich are

getting richer.

In absolute terms (the size of the slice), the

poor are getting richer, too.

In relative terms (the percentage of the

income), the poor are getting poorer.

Microeconomics
 Tracking studies that look at households over
a 10 year time period indicate that what
percentage of households moves into a higher
quintile after 10 years?
1. 20%
2. 35%
3. 50%
4. 75%
5. 85%

0 of 30
Unit 9 - Distribution of Wealth
and Incomes
 Income Inequality

The Lorenz Curve (see next slide)

shows the degree of income inequality.

The straight 45-degree line

represents perfect equality.
The more the Lorenz Curve
bows outward, the more
income inequality exists.

Microeconomics
Unit 9 - Distribution of Wealth
and Incomes
 Income Inequality – The Lorenz Curve

Microeconomics
Unit 9 - Distribution of Wealth
and Incomes
 Income Inequality

The Gini Coefficient is a ratio between 0

and 1. A coefficient of 0 means that the
country has perfect income equality. A
coefficient of 1 means that the country has
perfect income inequality.

The Gini Index is the coefficient expressed

as a percentage.
Microeconomics
Unit 9 - Distribution of Wealth
and Incomes
 Income Inequality

What do you think the Gini coefficient

should be?

Is there too much income inequality in our

country?
The 2009 Gini coefficient for the United
States was 44.3%; in 1988 it was 42.6%.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Income Equality

Advantages of having income equality:

 People who stress due to comparisons are

happier.
 Less use of natural resources and lower
consumption.
 More consumer satisfaction among the poor.

 Greater political equalities.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Income Inequality

Advantages of having income inequality:

 Greater incentives to work hard.
 Greater savings and investment.
 More high-quality and innovative products.
 More resources for the government and private
citizens to help the needy.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Poverty

The poverty line is an income amount below

which households are considered poor.

In the United States, a family of three persons

(two parents and one child in all states except
Alaska and Hawaii) was considered poor if it
earned less than $17,552 in 2010. The poverty line
increases each year along with increases in the
cost of living.
Source: http://www.census.gov/hhes/www/poverty/data/threshld/thresh09.html

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Poverty

In the U.S. the official poverty rate in 2009 was

14.3%. In 2008 it was 13.2%. In 2007, it was 12.5%.

For detailed information about incomes and distribution

across racial and demographic groups, visit:

http://www.census.gov/hhes/www/poverty/data/index.html

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Poverty

Not all poverty causes can be eliminated.

However, these actions have helped many
people avoid poverty:
 Live a healthy lifestyle.
 Learn a trade.
 Invest wisely.
 Make sound relationship decisions.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Government Anti-poverty Programs

Main programs in the United States include:

 TANF (Temporary Aid For Needy Families – 4.4m; $22b)
 Social Security
 Medicare (Medical assistance for the elderly)
 Medicaid (Medical assistance for the poor – 50m; $273b)
 Unemployment Compensation (10m; $160b)
 Food Stamps (40+m; $70b)
 Housing Subsidies
 Head Start
 Earned Income Tax Credit
 Job Training Programs
Microeconomics
Should we reform welfare programs?

1. Yes, increase total

spending
2. Yes, decrease total
spending
3. No
4. Not sure
 Unit 9 - Distribution of Wealth
and Incomes
 Anti-Poverty Program Effectiveness

How effective are government anti-poverty

programs?

How much do they cost?

How much do they raise taxes?
How much do they help the poor?
Are people better off when they work, or when
they are on welfare?

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Government Poverty Program Alternatives

There will always be a need to aid the less

fortunate.

The 1996 Welfare Reform Act has been a step in

the right direction.

Are there more effective ways to help the poor?

Microeconomics
Should we cut back on government welfare
programs and rely more on private charities
to provide help to the poor?
1. Yes
2. No
3. Indifferent
4. Not sure
 Unit 9 - Distribution of Wealth
and Incomes
 Government Poverty Program
Alternatives
Advantages of private charities:
 Decrease in taxes
 Less government spending, less borrowing, lower
inflation.
 Higher incomes mean more giving to charities,
especially if government is no longer responsible.
 Volunteers are motivated to help; government
welfare workers have possible conflict of interest.
 Small, private charities have better information
regarding the needs of the poor.
Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Government Poverty Program
Alternatives

Disadvantages of private charities:

 No guarantees.
 Decrease in giving during recessions.
 More potential for discrimination?

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Government Poverty Program Alternatives

The negative income tax plan proposes an income

level (for instance $18,000) above which an
individual will pay taxes, but below which an
individual would receive a government subsidy
(a subsidy is a negative tax).

The main advantage is that people will always

receive more income as they earn more money on
the job.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 The Negative Income Tax Plan

Job Earnings Government Total Income

Subsidy (50%)
$0 $9,000 $9,000

$4,000 $7,000 $11,000

$10,000 $4,000 $14,000

$18,000 $0 $18,000

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Tax Systems

We distinguish between three types of tax

systems:
1. Progressive taxes
2. Proportional (flat) taxes
3. Regressive taxes

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Progressive Taxes

Higher income earners pay a

higher marginal tax rate.

Example: Individual Income Tax System.

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Individual Income Tax System
Taxable Income for a Marginal Tax Rate
Single Person in the U.S. in
2010
$0 – $8,375 10%
$8,375 and $34,000 15%
$34,000 and $82,400 25%
$82,400 and $171,850 28%
$171,850 and $373,650 33%
over $373,650 35%
 Unit 9 - Distribution of Wealth
and Incomes
 Proportional Taxes

Everyone pays the same percentage tax.

Example: Social Security tax (up to a

certain income amount).

Microeconomics
 Unit 9 - Distribution of Wealth
and Incomes
 Regressive Taxes

Higher income earners pay a lower

percentage tax as a percentage of their
income.

Example: state sales taxes

Microeconomics