Discussions a. According to the U.S. Department of the Treasury, people in the t

Question

Discussions

a. According to the U.S. Department of the Treasury, people in the top income quintile (20%) pay roughly 70% of all federal income taxes, with the remaining 80% paying less than 30%. Further, the bottom half of the population pays less than 10% of all taxes. Many politicians assert that they want to bring tax relief (presumably with the idea of redistributing income) to the “middle and lower income” families. Given this distribution of income tax payments, would you support this type of policy? Why or why not?

b. How does the Gini coefficient differ from the Lorenz curve?

c. Economist Steven Landsburg (New York Times, January 16, 2008 p. A23) made the point that “bullying and protectionism have a lot in common. They both use force (either directly or through the power of law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted.” He also argued, “Surely we have fellow citizens who are hurt by those [trade] agreements...What do we owe those fellow citizens?” The United States has programs to educate and retrain workers displaced by free trade agreements. Do we even owe them that? Why or why not?.

Explanation / Answer

(a)

A tax relief program is designed to lessen the tax burden on the middle-to-low income families.

In this case, the taxation system is progressive: With higher (lower) income, tax rate is also higher (lower). Therefore, already the higher-income persons are being taxed at a higher rate than the lower-income persons. Additional tax relief program will further increase the tax burden of the higher-income groups.

However, this is a subjective and opinionated question and an opposite stance also can be taken by supporting an additional tax relief program by increasing the tax revenues from higher-income brackets, and lowering tax rate of middle-to-lower income groups because the "Rich have higher ability to pay".

(b)

Lorenz curve is a graphical representation of income distribution that shows how much of the Total Income is owned by the bottom X% of the population. If every individual's income is the same, Lorenz curve is a straight line (and is called Line of Perfect Equality.

Gini Coefficient is a Statistical number that represents the income distribution, and ranges between 0 (Perfect income equality) and 1 (Complete income inequality).

(c)

Yes, such re-train programs are justified.

When Free Trade Agreements (FTAs) relax the trade rules & increasing trade volumes, if such FTA discourages exports but encourages imports in the US, then domestic workers will immediately lose job as result of lower domestic output. In that case the re-train cost should be borne by the government whose decision has resulted in such lay-off for the worker, lowering his or her social welfare and earnings.

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