1-) Large income transfers are targeted toward the elderly, famers, and the unem

Question

1-) Large income transfers are targeted toward the elderly, famers, and the unemployed, regardless of their economic condition. Why do you think this is so? Do you think there would be less income inequality if the government levied higher taxes in order to make larger income transfers? Why or why not?

2-)As U.S. trade with low-wage countries like Mexico increases, will wages in the United States be pushed dow? Why or why not? Ae low-wage workers in the United States hurt when there is more trade with Mexico? Discuss

Explanation / Answer

INCOME INEQUALITY AND GROWTH: THE ROLE OF TAXES AND TRANSFERS • Inequality of income before taxes and transfers is mainly driven by the dispersion of labour income and the prevalence of part-time employment and inactivity. Despite their wider dispersion, self-employment and capital income play a smaller role. • Tax and transfer systems reduce overall income inequality in all countries. On average across the OECD, three quarters of the reduction in inequality is due to transfers, the rest to direct household taxation. • In some countries, cash transfers are small in size but highly targeted on those in need. In others, large transfers redistribute income mainly over the life-cycle rather than across individuals. • The personal income tax tends to be progressive, while consumption taxes and real estate taxes often absorb a larger share of the current income of the less well-off. • Some reforms of tax and transfer systems entail a double dividend in terms of reducing inequality and raising GDP per capita. In particular, reducing tax expenditures, which mostly benefit the well-off, contributes to equity objectives while also allowing for a growth-friendly cut in marginal tax rates. • Other reforms may entail trade-offs between these two policy objectives. Shifting the tax mix to less-distorting taxes – in particular away from labour towards consumption – would improve incentives to work and save, but raise inequality – at least at a given point in time. Understanding inequality 1. What ultimately matters for people is their income after taxes and transfers, which largely frames their consumption possibilities. The best and most comprehensive available income measure is household disposable income that has been adjusted for household size and for publicly-provided in-kind transfers, such as public spending on education and health care. This income concept, which should ideally be further adjusted to take indirect taxes into account, is shaped by various factors, which are summarised in Figure 1. Income distribution measures are discussed in Box 1. 2. This Policy Note covers two of these five income concepts – household market income and household disposable income, as they are the most relevant in shaping income inequality. It focuses on inequality at a given point in time. Concerns with different aspects of inequality may be less acute, when looked at over people's entire lifetime, as fluctuations of income over time are not considered. For example, consumption and real estate taxes tend to be less regressive from a lifetime than from a current income distribution perspective. An analysis of lifetime income inequality is not possible, due to the absence of harmonised cross-country datasets.

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