TEST YOURSELF

1.   The poverty rate is the percentage of families whose annual income falls below the poverty line.  The rate increases during recessions.

2.   If prices have risen by a factor of seven, the official poverty line would be $24,000 since it is adjusted for inflation (cost of living).  This is close to the actual poverty line for a family of four, which is $20,500.

DISCUSSION QUESTIONS

2.   There can be many choices. If the tax rate is constant, then the break-even income level will be equal to the guaranteed income level divided by the tax rate.

4.   One could think of output and equality as two goods that can be bought. If one knew their relative costs and the relative utility associated with each, then one would purchase good A (equality) until the point at which its marginal cost was just equal to the marginal utility of good B (output) that is being given up. In fact, there are many practical, and even theoretical, problems inherent in making such a calculation. First, we do not really know what the trade-off between equality and output is, so we cannot determine their relative costs. Second, we do not know how much benefit each gives us. More fundamentally, we each may have different assessments of the benefits from each, and it is impossible to aggregate these assessments. One would not be surprised, for example, to learn that a currently poor person puts a higher value on equality than does a currently rich person.

5.   The distribution of income in the United States has indeed grown more unequal since the 1970s. A flat tax would be less effective in reducing inequality than would a progressive income tax, since people with the top incomes would pay (almost) the same tax rate as people in the middle. If low incomes are exempted, the flat tax could have some progressive effect. One argument in favor of the flat tax is that it would promote efficiency by eliminating loopholes and lowering the marginal tax rate; if so, the tax would be an example of the trade-off between equality and efficiency: sacrificing equality for the sake of efficiency.