Income Inequity

Another market failure is income inequity which is massive differences in incomes realized by different types of labor. Government tries to lessen income inequity through various tax systems.

• Proportional tax system – A proportional tax taxes an equal percentage of income from all tax payers. For example, two tax payers of different income will each pay ten percent of their income in taxes. A person who earns $100,000 will pay $10,000 while a person who earns $50,000 will pay $5,000 in taxes.
• Regressive tax system – A regressive tax will tax a higher percentage of income from the lower income earner while at the same time taxing a lower percentage of income of the higher income earner. For example, a person who earns $100,000 will pay $9,000 (9%) in taxes while the person who earns $50,000 pays $5,000 (10%) in taxes.
• Progressive tax system – A progressive tax system taxes higher income earners at a higher percentage of their income than it does of lower income earners. For example, a person who earns $100,000 will pay $10,000 (10%) in taxes while the person who earns $50,000 pays $4,000 (8%) in taxes.

A progressive tax system such as the one used in the United States is a way of government lessening the income inequities produced by the market economy.

For  more information, see Reffonomics: Lorenz Curve and Gini Coefficient Lesson, Multiple Choice Questions.

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