Question

1.

The country of Dystopia is composed of 500 workers and 100 managers

Workers earn $100 and pay $10 in taxes a day.

Managers earn $1,000 a day in salary, bonuses and performance pay.

They also own investments that accrue around $300 a day in dividends, interests and capital gains. Managers also pay around $200 a day in taxes.

Dystopia provides free health care and housing to all its residents, of $40/day in value

Part a) Calculate the net national income of Dystopia. (Assume zero depreciation)

Part b) What is the pre-tax labor’s share of national income in Dystopia?

Part c) What is the pre-tax share of total income going to the top 20% in Dystopia?

Part d) What is the post-tax share of national income going to the top 20% in Dystopia?

Part f) Draw the pre- and post-tax Lorenz Curves in Dystopia.

Part g) Calculate the pre- and post-tax income Gini coefficients for Dystopia.

2.

Imagine a society where the rich and the poor work equally hard and for equally long. But the poor earn $100 a day while the rich earn $100,000 a day. (Hey look – we’re back in Dystopia!) Say this is solely due to luck – there are some cushy jobs and the rich are the ones who got lucky enough to get the cushy jobs. Would a utilitarian social planner command Dystopia to redistribute? Why or why not?

3.

Part a) In Excel, plot the following over time 1970 and 2016.

i. share of pre-tax income going to the bottom 25%

ii. share of post-tax income going to the bottom 25%

iii. share of pre-tax income going to the top 1%

iv. share of post-tax income going to the top 1%

Interpret the data and provide a clear description of what has happened to income inequality in the U.S., and the role of tax and transfer policies. (Make sure you have legends explaining which series is what, and use markers that can help the reader tell which series in which in a graph.)

Part b) Make a table showing the pre- and post-tax income share for top 1% and bottom 50% in US and Canada in 1985 and 2010. What are the differences in levels and trends in income concentration in the two countries and what is the role of taxes? How do taxes and transfer affect the bottom 50% in the two countries – are there differences across US and Canada in the extent of redistribution? (Clearly label the row and column headers with years, outcomes and countries, and make sure there is a title explaining the table)

Instructions: Go to http://wid.world and select “Country Graphs” and select the country (first US and then Canada). Choose “More indicators” and then “Income inequality” to choose either “top 1%” or “custom” to specify the percentile range. Also, the top right corner box “Change concept” can be used to select pre- and post-tax incomes. Once everything is visible, choose format “xls” or “xlsx” to download the data and plot these in Excel.

4.

Citizens of Independence believe in free enterprise and self-reliance. As a result, they have a minimal state and virtually no redistribution. In contrast, Solidarity has a social democratic orientation with generous welfare payments and tax subsidies for those at the bottom.   Here are the post-tax income shares in both countries.

Independence Solidarity

Decile

1 0.01 0.05

2 0.02 0.05

3 0.03 0.05

4 0.04 0.06

5 0.05 0.07

6 0.1 0.1

6 0.15 0.11

7 0.17 0.12

9 0.2 0.12

10 0.23 0.27

Part a) Draw Lorenz curves in Excel for both societies.

Part b) Calculate the Gini coefficients for both countries. Which is more unequal based on the Gini? How about income concentration at the top? Discuss the similarity or difference in the two approaches.

Part c) From a Rawlsian perspective, is it possible to determine which society – Independence or Solidarity – is more just? Why or why not?

Answer 1