jump to navigation

Income Inequity July 14, 2010

Posted by petrarcanomics in Role of Government.
trackback

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.

Advertisements

Comments»

No comments yet — be the first.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: