GWARTNEY – STROUP – SOBEL – MACPHERSON
Income Inequality and Poverty
Full Length Text — Part: 5
Micro Only Text — Part: 3
Chapter: 28
Chapter: 15
To Accompany: “Economics: Private and Public Choice, 15th ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
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How Much Income Inequality
Exists in the United States?
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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Share of Money Income
by Quintile, 1970-2009/2010
•During the last four
decades, the share of
income earned by the
top quintile has
steadily risen, whereas
that earned by the
lowest has fallen.
•In 2010, the top
quintile of families
earned approximately
12 times as much
before tax money
income as the bottom
quintile of families.
•Taxes and transfers
increase the income
share of the bottom
three quintiles and,
thereby, reduce
income inequality.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
–––– Share of Money Income, by Quintile ––––
Before Taxes
After Taxes & Transfers
(1970 & 2010)
(2009)
49.5
47.8
44.4
40.9
23.8 23.5
17.6
12.2
5.4
23.9 23.9
15.4
14.5
9.5
8.6
16.3
10.8
3.5 4.6
3.8
Fourth Highest
Lowest Second Third
Quintile Quintile Quintile Quintile Quartile
1970
2010
Fourth Highest
Lowest Second Third
Quintile Quintile Quintile Quintile Quartile
Before
After
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Factors that Influence
Distribution of Income
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• A high portion of annual income inequality is due to
differences in:
• age,
• education,
• family size,
• marital status,
• number of earners in the family, and,
• time worked.
• Young, inexperienced workers, students, single-parent
families, and retirees are over-represented among those
with low incomes.
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15th
High and Low Income Families, 2011
Bottom 20%
of income
recipients
Top 20%
of income
recipients
27
11
2
63
Age of householder (percent distribution)
under 35
35 - 64
65 and over
33
48
19
12
78
10
Family status
Married-couple family (% of total)
Single-parent family (% of total)
44
56
92
8
3
3.4
0.7
2.1
11
62
6
33
Education of householder
Percent with less than high school
Percent with college degree or more
Persons per family
Earners per family
% of married-couple families
in which wife works full-time
Share of total work hours
supplied by group
edition
Gwartney-Stroup
Sobel-Macpherson
Source: http://www.census.gov and author calculations from the March 2012 Current Population Survey.
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15th
Why Has Income Inequality Increased?
edition
Gwartney-Stroup
Sobel-Macpherson
• Income inequality in the U.S. has increased due to
the growth of:
• both single-parent and dual-earner families
(as a share of the total),
• earnings differentials on the basis of skill and
education,
• the number of “winner-take-all” markets, and,
• lower marginal income tax rates inducing high
earners to report more income.
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Income Mobility and
Inequality in Economic Status
15th
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Gwartney-Stroup
Sobel-Macpherson
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15th
Income Mobility
edition
Gwartney-Stroup
Sobel-Macpherson
• Annual income data hide the movement of people up
and down the income distribution over time.
• Tracking of household income over time shows there is
considerable movement both up and down the income
spectrum.
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15th
edition
Income Mobility: 1987-2007
% Distribution
by Income Status of Family in 2007
% Distribution
by Income Status of Family in 1987
•This table allows us
to see how families
in each income
bracket in the U.S.
fared 20 years later.
•51.6% of those in
the top quintile
had fallen to a lower
quintile by 2007.
•Similarly, 57.7% of
those in the bottom
quintile in 1987 had
moved up the income
ladder by 2007.
•Do you think there is
substantial income
mobility in the U.S.?
Gwartney-Stroup
Sobel-Macpherson
Highest
quintile
Next
highest
quintile
Middle
quintile
Next
lowest
quintile
Lowest
quintile
Highest
quintile
48.4
23.3
13.5
7.5
7.3
Next
highest
quintile
24.4
29.1
20.7
15.0
10.7
Middle
quintile
14.0
25.2
26.0
19.8
15.0
Next
lowest
quintile
7.8
15.5
23.4
28.5
24.7
Lowest
quintile
5.4
6.9
16.4
29.2
42.3
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. Do you think the current distribution of income in the
United States is too unequal?
2. Indicate three factors that have contributed to an
increase in income inequality in the United States since
the mid-1970s.
3. (Which of the following is true?)
Data on income inequality in the U.S. indicate
(a) The “rich” stay rich and the “poor” stay poor.
(b) there is substantial movement among income
groupings in the United States.
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First page
Poverty in the United States
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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15th
edition
Changing Composition of the Poor
Number of poor families (millions)
Percent of poor families headed by a:
Female
Black
Elderly person (aged 65+)
Person who worked at least
some during the year
Poverty rate (%)
All families
Married-couple families
Female-headed families
All individuals
Whites
Blacks
Children (under age 18)
Gwartney-Stroup
Sobel-Macpherson
1959
1976
2011
8.3
5.3
9.5
23
26
22
70
48
30
14
55
52
26
7
44
18.5
15.8
42.6
22.4
18.1
55.1
27.3
10.1
7.2
32.5
11.7
9.1
31.1
16.0
11.8
6.2
31.2
15.0
12.8
27.6
21.9
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and http://www.census.gov.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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Transfer Payments
and the Poverty Rate
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• Income transfers have expanded substantially since
the mid-1960s.
• These transfers have been largely ineffective at reducing
the poverty rate.
• Though real per capita income has increased
substantially over time (more than 120% since 1965),
the poverty rate of working-age Americans has stayed
about the same.
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15th
edition
Poverty Rate, 1947-2011
U.S. Poverty Rate (%)
(all families)
32.0
•The official poverty rate
of U.S. families declined
sharply during the
1950’s and 1960’s …
but has been relatively
constant at about 10%
since 1968.
Gwartney-Stroup
Sobel-Macpherson
18.5
13.9
10.0
9.7
10.3 10.7
11.8
8.7
1947 1959 1965 1968 1975 1980 1990 2000 2011
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982,
Table 5; and http://www.census.gov .
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
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15th
edition
Poverty Rate, 1947-2011
U.S. Poverty Rate (%)
32.0
•The orange shaded part
of the bars indicate the
drop in the poverty rate
when non-cash benefits
are counted as income.
•With non-cash benefits
added, the poverty rate
during most of the
period since 1968 has
ranged from 7% to 8%.
Gwartney-Stroup
Sobel-Macpherson
(all families)
18.5
13.9
10.0
9.7
10.3 10.7
11.8
8.7
1947 1959 1965 1968 1975 1980 1990 2000 2011
Income
Non-cash benefits
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982,
Table 5; and http://www.census.gov .
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15th
Income Transfer Effects
edition
Gwartney-Stroup
Sobel-Macpherson
• Income supplements large enough to significantly increase
the economic status of poor people will:
• encourage behavior that increases the risk of poverty
• create high implicit marginal tax rates that reduce the
recipient’s incentive to earn.
• Samaritan’s dilemma:
Income transfers to the poor tend to reduce the opportunity
cost of choices that lead to poverty.
• Thus, the goals of increasing the income of the poor
through transfers and discouraging behavior that leads to
poverty are in conflict.
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Implicit Marginal Tax Rates
and the Incentive to Earn
•Here you see the implicit
marginal tax rates facing
a low-income mother with
one child in West Virginia.
•As her work earnings go up,
her income & employment
taxes increase and transfer
benefits are reduced.
•The combination of taxes
and reduction in benefits
takes more than 40% of the
increase in earnings in the
$5,000 – $15,000 range.
•The implicit marginal tax
rate peaks in the $15,000
to $20,000 interval at 74%.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Effect of Transfer Benefits and Taxes on a
West Virginia Mother with One Child
to Earn Income (July 2007)
Earned
Income
From Work
Transfer
Benefits
Income and
Employment Spendable
Taxes
Income
Implicit
Marginal
Tax Rate
(%)
$0
$ 8,976
$0
$ 8,976
5,000
8,225
383
12,842
22.7%
10,000
6,503
765
15,738
42.1
15,000
4,955
1,420
18,535
44.1
20,000
1,914
2,072
19,842
73.9
25,000
1,115
2,697
23,419
28.5
Source: Based on Anthony C. Gregory and J. Sebastian Leguizamon, “Quit Punishing the
Working Poor: Reduce Work Disincentives in the Welfare System,” in Unleashing Capitalism:
Why Prosperity Stops at the West Virginia Border and How to Fix It, ed. Russel Sobel
(Morgantown , WV: Public Policy Foundation of West Virginia, 2007).
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Income Inequality:
Some Concluding Thoughts
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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15th
Income Inequality
edition
Gwartney-Stroup
Sobel-Macpherson
• Positive economics cannot determine how much
inequality should be present.
• Income inequality reflects differences between
individuals and influences their incentive to develop
resources and engage in productive activities.
• The nature of the process, as well as the pattern of
income distribution, is relevant to the issue of fairness.
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. What is the poverty threshold income level? How is it
measured? Is the threshold adjusted for family size?
Is it adjusted for inflation?
2. What impact did the expansion in government income
transfers during the 1960s have on the poverty rate?
Was the War on Poverty successful? Why or why not?
3. Do individuals have a property right to income they
acquire from market transactions? Is it a proper function
of government to tax some people in order to provide
benefits to others? Why or why not?
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
4. What determines whether a distribution of income
is fair? Do you think that the major income transfer
programs of the U.S. are fair?
5. The outcome of a state lottery game is certainly a very
unequal distribution of the prize. Some players are made
very rich while other lose their money. Is this outcome
fair? Is the process fair? Discuss.
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End of
Chapter 28
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