lec20_safety - Chapter 14: Labor Markets, Poverty, and...

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1 Problem set 3: due week of March 5-9 • Chapter 14, pages 421-423, prob #2 a-d, #8 Chapter 14: Labor Markets, Poverty, and Income Distribution K. Using welfare programs to reduce income inequality If someone from a poor household works more hours, they may lose their eligibility for Temporary Assistance for Needy Families, food stamps, Medicaid, housing assistance, child care, school lunches, earned income tax credit, … Basic tradeoff: Equity : we’d like the outcome to be equal and fair where everyone enjoys a decent standard of living Efficiency : we’d like to make sure that the incentives encourage everyone to have as high a standard of living as possible Chapter 14: Labor Markets, Poverty, and Income Distribution K. Using welfare programs to reduce income inequality L. Using negative income tax to correct income inequality Negative income tax: Each individual is entitled to a fixed payment (e.g., $10,000) no matter how much they earn. For example, if your income is Y , your tax is -$10,000 + 0.25 x Y
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2 85,000 15,000 100,000 47,500 2,500 50,000 19,000 -7,000 12,000 14,500 -8,500 6,000 10,000 -10,000 0 after-tax income taxes owed wage income 0.15 85,000 15,000 100,000 0.05 47,500 2,500 50,000 0 19,000 -7,000 12,000 0 14,500 -8,500 6,000 0 10,000 -10,000 0 average tax rate after-tax income taxes owed wage income 0.25 0.15 85,000 15,000 100,000 0.25 0.05 47,500 2,500 50,000 0.25 0 19,000 -7,000 12,000 0.25 0 14,500 -8,500 6,000 0.25 0 10,000 -10,000 0 marginal tax rate average tax rate after-tax income taxes owed wage income • Advantages: avoids the high marginal tax rates on richest and poorest, and therefore has smallest effect in terms of discouraging work effort • Disadvantages: poor households may not use money wisely Chapter 15: The Environment,
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This note was uploaded on 04/19/2010 for the course ECONOMICS econ 2 taught by Professor Nieta during the Spring '10 term at UCSD.

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lec20_safety - Chapter 14: Labor Markets, Poverty, and...

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