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THE DISTRIBUTION OF INCOME AND POVERTY WHO ARE THE RICH AND HOW RICH ARE THEY? By many interpretations, the lowest fifth (20%) of family income groups is considered poor, the top fifth is considered rich, and the three fifth in between are considered middle income. For a family of four to be considered rich in 1987 (2002?), the family had to earned $52,911. In 1987 (2002?), the lowest 20% earned 4.6% of the total money income and the highest 20% earned 43.7%. The highest 5% earned 16.9% THE INCOME DISTRIBUTION ADJUSTED FOR TAXES AND IN-KIND TRANSFER PAYMENTS One of the ways the government can change the distribution of income is through the means of taxes and transfer payments. Ex Ante Distribution (of income) The before-tax-and-transfer-payment distribution of income Ex Post Distribution (of income) The after-tax-and-transfer-payment distribution of income Transfer Payment Payments to persons that are not made in return for goods and service currently supplied. E.g., Welfare payments such as aid to families with dependent children, food stamps, housing, education, health care etc. In-Kind Transfer Payments Transfer payments, such as food stamps, medical assistance, and subsidized housing that are made in a specific good or service. The distribution of income don’t take into account taxes, or in-kind transfer payments however, it does take into account cash (monetary) transfer payments, such as direct monetary welfare assistance. THE EFFECT OF AGE ON THE INCOME DISTRIBUTION We need to distinguish between people who are poor for long periods of time (Sometimes their entire lives) and people who are poor temporally. E.g., a college student, who attends college and works part-time while doing so, her income is so low that she falls into the lowest fifth of income earning but it isn’t likely that this will always be the case. It is possible, in fact highly likely, that a person in her late twenties, thirties, or forties will have a higher income than another person in her early twenties or sixties, even though their total lifetime incomes will be identical. That is, if we view each person over time, income equality is greater than if we view each person at a particular point in time (say when one is 58 years and the other is 68).
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Income Distribution Adjusted for Taxes and Transfers A study by economists Edgar Browning and William Johnson to identify the export distribution of income in 1976 by adjusting for taxes (Specifically, income and payroll taxes) and all transfers, both cash and in-kind transfer payment. A Simple Equation: The factors that determine a person’s income: labor income, asset, income, transfer payment, and taxes. Individual income = wage rate + Asset income + Transfer Payments – Taxes 1. Labor Income = wage rate x Number of hours work 2. Asset Income = Return to saving; return to capital investment, and the return to land. MEASURING INCOME INEQUALITY
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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