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Redistribution of Income
Inequality and the Redistribution of Income
■ Types of inequality
✜ size distribution of income
✜ functional distribution of income
80
national income (cumulative)
Percentage share of
Line of complete
equality
60
40
20
O
O 20 40 60 80 100
Percentage of population
Lorenz curve
100
80
national income (cumulative)
Percentage share of
Line of complete
equality
60
40
20 Lorenz curve
O
O 20 40 60 80 100
Percentage of population
INEQUALITY AND POVERTY
■ Types of inequality
✜ size distribution of income
✜ functional distribution of income
✜ distribution of income by recipient
✜ distribution of wealth
✜ poverty: absolute and relative
Gini coefficient = A / (A + B)
80
national income (cumulative)
Percentage share of
Line of complete
equality
60
A
40
B
20 Lorenz curve
O
O 20 40 60 80 100
Percentage of population
Lorenz curve: UK households’ pre-tax incomes: 2000/1
100
80
national income (cumulative)
Percentage share of
60
40
x
24.6
20 Lorenz curve
O
O 20 40 5 60 80 100
0
Percentage of population
Lorenz curves for two countries with the same Gini coefficient
100
80
national income (cumulative)
Area X = area Y
Percentage share of
60 Y
40
Country B
20
X
Country A
O
O 20 40 60 80 100
Percentage of population
INEQUALITY AND POVERTY
■ Types of inequality
✜ size distribution of income
✜ functional distribution of income
✜ distribution of income by recipient
✜ distribution of wealth
✜ poverty: absolute and relative
■ Measuring the size distribution of income
✜ Lorenz curves
✜ Gini coefficients
✜ ratios of shares of quantile groups
Ratio of income shares of bottom 40% to top 20%
of households (after taxes and benefits)
INEQUALITY AND POVERTY
■ Distribution in the UK
✜ size distribution
Size distribution of UK income by
quintile group of households: 2000/1
Bottom
20%
Next 20%
2%
7%
Middle
20%
15%
Top 51%
20%
25%
Next 20%
Income before
taxes and benefits
Size distribution of UK income by
quintile group of households: 2000/1
Bottom Bottom
20% 20%
Next 20% Top
2% 6%
7%
20% Next 20%
11%
Middle
20%
15% 45%
Top 51%
20% 16%
Middle
20%
25%
22%
Next 20%
Next 20%
30
26.8
25
% of income
20
In c o m e b e fo r e ta
15.7
15 12.9
11.1
10 9.0
7.6
6.0
4.7
5
30
26.825.8
25
In c o m e b e fo r e ta
% of income
20 In c o m e a fte r ta x
15.715.2
15 12.912.6
11.110.9
10 9.0 9.1
7.6 7.8
6.0 6.3
4.7 5.2
5
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
Sources of UK household income as a
percentage of gross household income
Wages and salaries Income from self employment Investment income
1%
2% 10%
4%
6%
77%
1975
Source: Family Spending (ONS, 2002)
Sources of UK household income as a
percentage of gross household income
Wages and salaries Income from self employment Investment income
1% 1%
2% 10%
12%
4%
7%
6%
4%
9%
77% 67%
1975 2000/1
Source: Family Spending (ONS, 2002)
INEQUALITY AND POVERTY
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
Average gross weekly earnings of UK
full-time adult male employees: 2001
INEQUALITY AND POVERTY
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
£500
£400
£300
£200
One adult One adult, two or One man, one woman Two adults, four
£100 (not retired) more children (not retired) or more children
Source: Family spending (ONS,2002)
Weekly income for different types of UK households:
2000/1
£700
Gross income
£600
Disposable income
£500
£400
£300
£200
One adult One adult, two or One man, one woman Two adults, four
£100 (not retired) more children (not retired) or more children
Source: Family spending (ONS,2002)
INEQUALITY AND POVERTY
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
Medical practitioners
Financial managers
Personnel managers
Secondary teachers
Police officers
Nurses
Secretaries
Clerks
Sales assistants
Average gross weekly earnings of
UK full-time adult employees: 2001
Financial managers
Medical practioners
Personnel managers
Secondary teachers
Nurses
Women's
Factory lineworkers
Men's ear
Clerks
Sales assistants
INEQUALITY AND POVERTY
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
£600
£550
£500
£450
West Midlands
UK (average)
£400
South-East
North-East
N. Ireland
Scotland
London
£350
£300
■ Distribution in the UK
✜ size distribution
✜ functional
✦ by source
✦ by occupation
✜ distribution of wealth
Composition of UK wealth
Stocks and shares Notes, coin and deposits with banks, etc.
Dwellings (net of
Tenancy rights Other fixed assets
mortgage debt)
Life assurance and pension funds Other financial assets (net of liabilities)
15%
– 6%
26%
23%
23%
12%
7%
1971
Composition of UK wealth
Stocks and shares Notes, coin and deposits with banks, etc.
Dwellings (net of
Tenancy rights Other fixed assets
mortgage debt)
Life assurance and pension funds Other financial assets (net of liabilities)
1%
15%
– 6% 16%
26%
35%
23% 14%
23% 5%
12% 26% 3%
7%
1971 2000
INEQUALITY AND POVERTY
Regressive
Total tax paid (T)
Proportional
Lump-sum
O
Total income (Y)
Different types of tax: (b) average tax paid
Progressive
Average tax paid (T/Y)
Proportional
Regressive
Lump-sum
O
Total income (Y)
TAXES AND BENEFITS
Marginal
rate
40
Tax rate (%)
22
10
Marginal
rate
40
Tax rate (%)
22
Average
rate
10
Marginal
rate
40
Tax rate (%)
32
22
20
Marginal
rate
40
Tax rate (%)
32
22 Average
20 rate
W1
D
O Q1
Quantity of labour
Incidence of an income tax: elastic supply of labour
S + tax
Wage rate
W1
D
O Q1
Quantity of labour
Incidence of an income tax: elastic supply of labour
S + tax
Wage rate
S
W2
W1
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: elastic supply of labour
S + tax
Wage rate
S
W2
W1
W2 - tax
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: elastic supply of labour
S + tax
Wage rate
S
W2
W1
W2 - tax A
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: elastic supply of labour
S + tax
Wage rate
S
W2
B
W1 B: employer share of tax
W2 - tax A
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: inelastic supply of labour
S
Wage rate
W1
D
O Q1
Quantity of labour
Incidence of an income tax: inelastic supply of labour
S + tax
S
Wage rate
W2
W1
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: inelastic supply of labour
S + tax
S
Wage rate
W2
W1
W2 - tax
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: inelastic supply of labour
S + tax
S
Wage rate
W2
W1
A A: worker share of tax
W2 - tax
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: inelastic supply of labour
S + tax
S
Wage rate
D
O Q2 Q1
Quantity of labour
Incidence of an income tax: elastic supply Incidence
of labour of an income tax: inelastic supply
S + tax
S
S + tax
Wage rate
Wage rate
W2 B: employer share o
B W2
W1 B
A B: employer share of tax W1
W2 - tax A A: worker share of
W2 - tax
A: worker share of tax
D D
O Q2 Q1 O Q2 Q1
Quantity of labour Quantity of labour
TAXES AND BENEFITS
P1
D
O Q1
Quantity
Indirect tax applied to good X
£
S + tax
S
P2 Tax
P1
D
O Q2 Q1
Quantity
Indirect tax applied to good X
£
S + tax
S (=MC)
P2
P1
P2 - tax
D
O Q2 Q1
Quantity
Indirect tax applied to good X
£
S + tax
C
S (=MC)
P2
B A
P1
P2 - tax
D
O Q2 Q1
Quantity
Indirect tax applied to good X
£
S + tax
C
S (=MC)
P2
B A
P1
P2 - tax E D
F
D
O Q2 Q1
Quantity
TAXES AND BENEFITS
0 100
Average tax rate (%)
A Laffer curve
R max.
Total tax revenue
0 t1 100
Average tax rate (%)
TAXES AND BENEFITS
Budget
line
O Lmax
Leisure (hours)
Tax cuts and incentives
(a) The position with
no income tax
Ymax
Daily income
I3
I2
Budget
line I1
O Lmax
Leisure (hours)
Tax cuts and incentives
(a) The position with
no income tax
Ymax
Daily income
Y*
I3
I2
Budget
line I1
O L* Lmax
Leisure (hours)
Tax cuts and incentives
(b) The position
with income tax
Ymax
Daily income
Y2
I4
Y1 I3
I2
I1
O Lmax
Leisure (hours)
Tax cuts and incentives
(b) The position
with income tax
Ymax
Daily income
Y2
b
Y**
I4
Y1 I3
I2
I1
O L** Lmax
Leisure (hours)
Tax cuts and incentives
(b) The position
with income tax
Ymax
Daily income
Y2
a
b
Y**
I4
Y1 I3
I2
I1
O L* L** Lmax
Leisure (hours)
Tax cuts and incentives
(c) Cut in the basic
rate of tax
Daily income
Leisure (hours)
Tax cuts and incentives
(c) Cut in the basic
rate of tax
Daily income
r
Person
W
O L W1
Leisure (hours)
Tax cuts and incentives
(c) Cut in the basic
rate of tax
Daily income
r
Person
W
O L W2 L W1
Leisure (hours)
Tax cuts and incentives
(c) Cut in the basic
rate of tax
Daily income
r
Person
q W
Person X
O L W2 L W1 LX
Leisure (hours)
Tax cuts and incentives
(d) Increase in the
tax threshold
Daily income
Leisure (hours)
Tax cuts and incentives
(d) Increase in the
tax threshold
Daily income
O L1
Leisure (hours)
Tax cuts and incentives
(d) Increase in the
tax threshold
Daily income
O L1 L2
Leisure (hours)
TAXES AND BENEFITS
■ Cash benefits
✜ means-tested benefits
✜ universal benefits
■ Benefits in kind
■ Benefits and the redistribution of
income
Social protection benefits in various
European countries: (a) €per head
8000
7000 1999
6000
Euro per head
5000
4000
3000
2000
1000
0
Source: Eurostat, 2002
Social protection benefits in various
European countries: (b) % of GDP
35
1990
30
1999
25
% of GDP
20
15
10
0
Source: Eurostat, 2002
TAXES AND BENEFITS