Reducing Inequality & Poverty: Analyzing Income Distribution & Change Strategies - Prof. , Study notes of Introduction to Sociology

Download Reducing Inequality & Poverty: Analyzing Income Distribution & Change Strategies - Prof. and more Study notes Introduction to Sociology in PDF only on Docsity! Reducing inequality and poverty Outline ——————————————————————————— The top The middle and bottom Strategies ——————————————————————————— Strategies to reduce inequality do not have to follow directly from the causes of trends in inequality and poverty For example, if salaries for superstar entertainers are an important source of soaring incomes at the top, that doesn't mean the best solution is a cap on such salaries Technological change may have played a role in earnings stagnation at the middle and bottom, but we shouldn't try to slow it down The top Three groups at the top ——————————————————————————— 1. Top corporate officers (CEOs) 2. Financial players: investment bankers, lawyers 3. Entertainment and athletic superstars Two alternatives to a pay cap ——————————————————————————— 1. Encourage company boards to peg stock options payouts to the firm's performance relative to the market 2. Require boards to accurately reveal CEO pay to shareholders Very high taxes at the top? ——————————————————————————— This only works if there are lots of deductions/loopholes so that the effective tax rate is moderate Better to have moderate statutory and effective rates We could aim for rates a little higher than those under Clinton in the mid-1990s Taxes at the top ——————————————————————————— 0 25 50 75 100 Ta x ra te (% ) 1945 1955 1965 1975 1985 1995 2005 Year Top marginal federal income tax rate Effective federal tax rate on top 1% (P-S) Effective federal tax rate on top 1% (CBO) Note: These rates are for federal taxes only. The effective rate includes taxes on individual income, payroll (Social Security and Medicare), and corporate income. P-S = Piketty and Saez; CBO = Congressional Budget Office. Source: Tax Policy Center, www.taxpolicycenter.org; Thomas Piketty and Emmanuel Saez, data set for "How Progressive is the U.S. Federal Tax System?" Journal of Economic Perspectives, 2007; Congressional Budget Office, www.cbo.gov/doc. cfm?index=8885. The top ——————————————————————————— It may prove difficult to reduce income inequality We should aim to satisfy John Rawls' criterion: An increase in inequality is tolerable as long as the absolute well-being of those at the bottom improves The middle and bottom Trade and immigration ——————————————————————————— Imports and immigration may well have contributed to stagnant incomes in the bottom half But reducing them is likely to harm people in other countries who are much poorer We should look for other options before considering this strategy Education ——————————————————————————— Claudia Goldin and Lawrence Katz (The Race between Education and Technology, 2008) argue that the key to earnings stagnation since the mid-1970s is the slowdown in educational attainment No further increase in high school graduation Very little rise in college graduation B e Rnce I I How Anze7-icn Once Led and Cnn Wi7z the Rnce for Tomo7~ow 331 regions of the nation became a high school graduate. Leader and lag- gard states had existed in the early twentieth century. Although the manufacturing North caught up by 1940, the southern states, for black and white youth alike, had relatively low rates of high school enrollment and graduation until the 1950s. Finally, the gap between the South and the rest of the nation began to narrow. By 1970 the national public and private high school graduation rate was 77 percent and that for the South was about 70 percent. Although differences across regions still existed, they were a fraction of what they were earlier in the century. Starting around 1970 a disturbing trend became apparent in the high school graduation rate. The fraction of young Americans graduating -from public and private high schools began to backslide. Although the backsliding appears to have now ended, the high school graduation rate did not increase noticeably from 1970 to 2004. The conventionally measured high school graduation rate (the ratio of public and private secondary school graduates to the number of 17-year-olds), depicted in Figure 9.2, reveals a steady increase to 1970 and then a sudden change.13 The high school graduation rate, measured in this fashion, actually decreased at times, even as the fraction of youths continuing to college increased. We term this measure of the high school graduation rate "conven- tional" because the procedure counts diplomas received from typical bricks-and-mortar high schools, both public and private. But a noncon- ventional rate can also be constructed that includes high school equiva- lency certificates. Certification is through the GED exam, which was intl-oduced during World war II and has been greatly expanded since. The GED is administered at the state level and consists of a battery of five examinations that individuals can repeat if one or more are failed. The examination was proposed before World War II and gained support when some GI's returned to civilian life worldly wise but without a high school diploma. GED certification was first offered to civilians in 1952.14 In 1961 the GED accounted for more than 4 per- cent of all diplomas or GED certificates in the reporting states. By 1971, when GED data are first available at the national level, GED certificates were fully 7 percent of the total and in 1995 they accounted for 16 percent." GED certification declined significantly after 2000 and as a percentage of the total has returned to its late 1970s level of around 10 percent.16 a, Including GED recipients 1 m .................................................. % ------------ 1 0.0 I ' , I I I I I , , 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Figwe 9.2. Public and Private Secondary School Graduation Rates: 1890 to 2004. GED recipients include individuals receiving a GED certificate. They have been allocated to the closest year in which they would have been approximately 18 years old. Therefore, an individual receiving a GED at age 25 in 1990 would be included in the data for 1983. Only GED certificates awarded up to age 34 are included; in most years more than 85 percent of GED certificates are awarded to individuals less than 35 years old. The secondary school graduation rate is the number of public and private high school diplomas awarded in a year divided by the number of 17-year-olds in the United States. Sources: 1890 to 1970, see Chapter 6 and Appendix B. 1971 to 2004, Digest of Edz~cation Statistics, 2004 for public and private secondary school graduates and the number of 17-year-olds; American Council of Education (various yearsjf& GED certificates and age distribution of those certified. Some youths who drop out of high school later obtain a GED cer- tificate, often when they are considerably older than 18 years. More than 35 percent of GED certificates are earned by individuals older than 24 years of age, although just 15 percent are older than 34 years.17 By using the ages of those who received the GED certificate we can es- timate the number of GED recipients who had been 18 years old from 1972 to 1986 and add them to their peers who earned a high school diploma on time. We use only the group who received a GED certifi- cate before 35 years old.18 Minimum wage ——————————————————————————— 2008 level: $6.55 2009 level: $7.25 Increase it to $8 in 2010 and index it to inflation Reviewed regularly by a "Living Standards Commission," similar in status to our Federal Reserve and to the U.K.'s Low Pay Commission Allow state and local governments to address regional/local variation in cost of living Earned Income Tax Credit (EITC) ——————————————————————————— 2 or more kids 1 kid No kids Solid lines: married Dashed lines: single 0 5,000 10,000 15,000 20,000 20 08 E IT C ($ ) 0 15,000 30,000 45,000 60,000 75,000 Pretax household income ($) Note: 2008 EITC benefit. Source: Tax Policy Center (Brookings-Urban), www.taxpolicycenter.org/briefing-book/key- elements/family/eitc.cfm. Earned Income Tax Credit (EITC) ——————————————————————————— 2 or more children 1 child No children 0 5,000 10,000 15,000 20,000 P ro po se d EI TC ($ ) 0 15,000 30,000 45,000 60,000 75,000 Pretax household income ($) Note: Proposed EITC benefit. Median income for a household of four as of 2007: $75,000. Source: My calculations. How to fund the EITC increase ——————————————————————————— Higher taxes at the top Gradual reduction/phase-out of the homeowner mortgage interest tax deduction (≈$160 billion)