InCome Inequality and Political Philosophies

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The life cycle of a person’s income also affects the poverty rate. The typical young worker has a very low income but that income will rise as the worker matures and gains relevant experience; younger people are also more likely to borrow money to pay for a school or a house that they will later pay back once their income rises. By the time the worker reaches the age of 50, the worker is statistically at their peak income level and saving at their highest rate. When it comes time to retire, a sharp drop in income can be seen but their standard of living doesn’t necessarily decrease as they already have purchased and paid off major investments such as homes and vehicles. They also tend to have a decent savings account to maintain their standards of living. If the poverty rate took into consideration a person’s lifetime income, as opposed to their yearly income, fewer people would find themselves in poverty.

Finally, the poverty rate takes into consideration a person’s annual income as opposed to their permanent income also known as normal income. A corn farmer may see a rough year profit wise due to a drought reducing the quantity of corn produced; this decrease in profit could temporarily decrease the farmer’s standard of living, causing him to be considered one of those living in poverty. The next year, however, the corn prices may be higher and perfect farming weather conditions may cause the farmer to see a higher than average quantity of corn. That year the farmers profits would be much higher than normal, allowing the farmer a higher than normal standard of living and a place way above the poverty line. To adequately measure the standard of living, it is best to use permanent income since it shows a more equally distributed income.

How does the United States inequality compare to other countries? This is a very difficult question to answer because not all countries collect data the same way. Some may collect data on individual incomes, others may collect data on family incomes and others may collect the data based on

expenditures. Some countries

either don’t collect because

they do not have the resources

to do so; other countries collect

the data for their personal

benefit but do not share that

data with the rest of the world.

Because of this, it is very difficult to determine the true difference between the two countries’ economies. That being said, when we compare the inequality in some of the top populated countries in 2011 (see Figure 2), where they inequality measurement is the ratio of income received by the richest twenty percent of the population to the income of the poorest twenty percent. Japan is considered the most equal in their income distribution with the top fifth only receiving 3.4 times the amount of income as the bottom fifth. The inequality gap is the largest in South Africa where the top group receives 20.2 times as much income. The United States falls slightly towards the larger inequality gaps with a gap of 8.5 times larger for the top fifth. Compared to other economically advanced countries, the U.S. falls behind but when compared to the developing countries, the U.S. has a more equal income distribution (Mankiw, 2015.)[pic 4][pic 5]

How do policy makers fix the income distribution inequalities? There are a few different political philosophy’s that government use regarding the inequality including utilitarianism, liberalism, and libertarianism. If the government believes they should play a role in distributing income there are several policies they can enact to reduce the poverty in their country. These policies include minimum–wage laws, welfare, negative income tax, in-kind transfers, antipoverty programs and work incentives.

The first political philosophy school of thought is utilitarianism. Utilitarianism was founded in the early 1800’s by English philosophers Jeremy Bentham and John Stuart Mill. The idea was that income should be distributed based on diminishing margin utility. According to utilitarianism, the government should choose policies that will maximize the total happiness or satisfaction, also known as utility, of everyone in society. A dollar of extra income would provide more utility to a poor person than it would for a rich person. As a person’s income rose, the utility received from an additional dollar falls. With this assumption, the goal of the government is to achieve a more equal income distribution. However, the government does not want to reach exactly equal incomes because of one of the Ten Principle of Economics: People respond to incentives. An example of utilitarianism is Mary and Ann. Both ladies are exactly the same except Mary earns $10,000 a year and Ann earns $100,000. If we took $1 from Ann and gave it to Mary it would decrease Ann’s utility and increase Mary’s. This utility increase Mary sees will be greater than the decrease Ann sees; the redistribution of income raised the total utility. The goal of the utilitarian’s is not necessarily to make the poor people wealthy, but instead to maximize the total utility. Utilitarianism is not necessarily about taking from the rich; it also allows the poor to suffer, provided the suffering is outweighed by gains somewhere else in the economy.

The United States is a good example of a utilitarian based economic system. In order to redistribute the income of its citizen, the governments uses polices such as income taxes and welfare systems. The U.S government uses a progressive tax to collect money that it can then redistribute. Those with high incomes pay a larger percentage on their income taxes. Those with lower income receive a subsidy or a negative income tax. For example, the government may create the following formula to compute a family’s tax liability:

Taxes owed = ¼ of income - $5,000.

If a family earned $24,000 it would pay $1,000 in taxes but if another family earned just $16,000 that year it would owe -$1,000. In other words the second family would receive a check for $1,000. The downfall of the negative tax is high and low income workers have less incentive to work because the more he earns the less he receives. Eventually, no one will work as hard and the total income and utility falls. This is why utilitarianism governments avoid equilibrium and allow some suffering to the poor.

Another policy used by a utilitarianism economic based system is welfare. With this system, the government supplements the income of those with low income. One example of a welfare programs is the U.S. welfare

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