Income after taxes and benefits and graphical representation of Lorenz curve of before and after tax benefits.

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Chapter 20, Problem 5SPPA

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Income after taxes and benefits and graphical representation of Lorenz curve of before and after tax benefits.

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A Lorenz curve is a graph whose axes measure the: a. total amount of income in dollars on one axis and the total number of individuals or families receiving that income or a lower one on the other. b. percentage of people (10 percent, 20 percent, etc.) on one axis and the percentage of total income received by the lowest 10 percent, the lowest 20 percent, etc., on the other. c. number of individuals or families receiving a certain income on one axis and the percentage of the total population represented by that number on the other. d. number of individuals or families in different occupations on one axis and the median income received in that occupation on the other. e. income classes (e.g., $0 to $1999 and $2000 to $3999) on one axis and the percentage of individuals or families in each such income class on the other.

The table shows after-tax income shares in Canada in 1986 and 2015. After-tax income After-tax income 1986 2015 (percent of total) Households Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Highest 20 percent 5 11 18 25 41 7 13 18 23 39 Draw a point to show the income earned by the lowest 20 percent of households in 1986. Draw a point to show the income earned by the lowest 60 percent of households in 1986. Draw a Lorenz curve that is consistent with the two points you've plotted. Canadian after-tax income is distributed equally in 2015 than in 1986. 100- 90- 80- 70- 60+ 50- 40- 30+ 20- 10- 04 Cumulative percentage of income 10 20 30 40 50 60 70 80 90 100 Cumulative percentage of households >>> Draw only the objects specified in the question.

1. An economy's Lorenz Curve reveals that an economy's highest income quintile has 65% of the economy's income while the lowest income quintile only has 5% of the economy's income. Solely based on the Lorenz Curve, is this distribution of income fair? Why or why not? 2. To combat income inequality and to generate increased tax revenues to fund expenditures, government officials decide to aggressively increase how progressive income taxes are, so much so that the top income earners are marginally taxed 90% of their income (and while this marginal tax rate may seem oppressive, these top income earners still have more than enough income to satisfy all of their needs and all but the most extravagant of wants - basically, these earners have more than enough money). Argue why this tax policy is a fair approach to fund government expenditures. Why might this tax policy fail to achieve its objectives (tax revenues would actually decline as a result)?