Economics Chapter 7 Notes PDF

Economics Chapter 7 NOTES (Economic Welfare and Income Distribution) By: Christian 7.3 - Excise Taxes Starting off with definitions we got… * Direct Tax: tax where INDIVIDUALS pay the government DIRECTLY (e.g- income tax, property tax) * Indirect Tax: collected by SUPPLIERS by cha...

Economics Chapter 7 NOTES (Economic Welfare and Income Distribution) By: Christian 7.3 - Excise Taxes Starting off with definitions we got… * Direct Tax: tax where INDIVIDUALS pay the government DIRECTLY (e.g- income tax, property tax) * Indirect Tax: collected by SUPPLIERS by charging consumers (collected by businesses) There are 2 types of indirect taxes… * Value added tax - % of sale price (e.g- HST you pay) * Value added tax means that you pay tax on every level (THAT TAX $ DOES NOT BELONG TO THE BUSINESS) * Excise Tax - a tax on a particular product expressed as a fixed dollar amount per unit of quantity (e.g- alcohol tax, gas tax) * It’s not fixed on the sale price, its fixed on a per unit basis (E.g 40 cents per cigarette) * When you have excise tax, its all already in the price (E.g- if you went to go buy gas for $1.40/L, the tax is already IN) Moving onto how the Excise Tax affects the supply curve… * It creates a new SUPPLY curve with the tax in it (Stax) - This is seen by consumers * The new supply curve AFFECTS PRODUCERS * The new supply curve shows the price that we pay and the price that consumers get to keep * It’s always vertically above the initial SUPPLY curve which is seen by producers What is the Impact of Excise Tax? * Where the demand curve crosses the Excise Tax curve (Equilibrium), that's what consumers pay * Once you make a dotted line going down, where that dotted line crosses the original supply curve (S0), that's what PRODUCERS get. * The difference between what PRODUCERS PAY and what CONSUMERS GET, that's the amount of tax * Suppliers don’t just increase the price since if they raise the price, tax goes up and less consumers buy the product (law of demand) * This TAX places a BURDEN on both CONSUMERS AND PRODUCERS * Top Box A measures how much consumers pay more before the Tax - This is the consumers burden (Area of Box) * Bottom Box B measures how the tax affected the producers - This is the producers burden (Area of Box) * The TAX REVENUE for the government is the area of both boxes (You can either add the area of both boxes or treat both boxes as 1 and find area) * For this example, consumers pay $2.50 and there's a 1 dollar tax, so producers collect $1.50 (It shows in the graph) * The tax revenue is 7 Million (if you don't understand, calculate the area of producers & consumers then add) What is the effect of Demand Elasticity? Relationships: Looking at the supply and demand curves, picture the demand curve getting steeper. What box will get bigger? Box A. The consumer burden will get bigger with the more inelastic that the demand curve becomes. The flatter that the demand curve becomes, the producers will suffer more. Consumer burden will be smaller. 7.4 - 7.5 - The Distribution of Income The “For Whom” question is answered in this portion of the chapter. Remember how we had the 3 economic questions? For Whom will be answered. What tool will be used to measure Income Distribution? It's the… Lorenz Curve: takes consumers from the lowest income earners to highest based on consumers, tourists, etc. and measures how much of the lowest incomers get? The second lowest? The highest? Etc. * These numbers really haven't changed since 1961 if you were to compare to 2011 * The biggest change is that the highest earning households got a bit more at the expense of the second, third and fourth groups * There has not been RADICAL change Moving onto the actual Lorenz Curve (keep in mind we are graphing the cumulative numbers) * Keep in mind cumulative numbers is (for example, if you were to see how much the 1st and 2nd income households get, they get 14% of the income together, that 14% is what we are graphing) * Cumulative numbers are always the percentages added together * The spacing will always be in 20’s for x and y axis * You will always put the extreme conditions (perfect equality which is the diagonal line and perfect inequality is the x axis line and the right y- axis line) * Perfect Inequality is all households get 0 except for the highest earners (that's why the x axis is for low earners and the highest is a straight line) * Point E will ALWAYS be at 100 * Lorenz curves are useful to compare with curves with 2 economics/countries * Another way of comparing 2 countries is to find the area of t Relationships for Lorenz Curve: * The closer the curve gets to the perfect equality line, the more equally distributed the income will be * The farther that the curve goes away to the perfect equality and more toward perfect inequality, the more unequally distributed the income will be * Examples: Finland is more of a country where the income distribution is equal considering that they have laws to make it more equal so it would bow closer to the perfect equality line, while for the USA it's more unequal so it would bow closer to the inequality line There is another way of comparing these 2 countries instead of graphing it and looking at the numbers. This is the… Gini Coefficient: this provides a number measure of income distribution. * This is done by finding the area between the perfect equality line and the actual parabola and DIVIDING it by the area of the actual parabola and the perfect inequality line * Gini Coefficient = area of perfect equality to parabola/parabola to perfect inequality * The Gini coefficient for perfect equality will ALWAYS be 0 * The Gini coefficient for perfect inequality will ALWAYS be 1 * So the number we get from dividing will be between 0 and 1 and if its closer to 0, its more equal and closer means more unequal. If we were to look at the distribution of other things in the world, you will find more higher income households will be found in areas around us. This leads us to… Pareto Distribution: 80% of consequences come from 20% of the causes * E.g - 80% of income generated is attributed to 20% of the population, 80% of the awards are received by 20% of the students Another one similar to this concept is… Price Law: the square root of the number of people in an activity are producing 50% oft the work * E.g - Out of 100 workers, 10 of them are doing 50% of the work The bottom line is that people are different, therefore our output is different and if we don't force the output to be equal, this is how it will tend to play out. NOTE there's movements in the lowest to the highest income categories, it doesn’t mean that the categories stay at the same level all the time, there's movement. Of course, there's exceptions where there is generational wealth, but there are movements in the households. That's what we want, because that shows that there is opportunity in this mixed free market. 7- Appendix: The Welfare Society To connect to welfare society, we are going to define Poverty Poverty: (general definition) - not able to afford necessities of life (food, clothing shelter) * This is not easy to define and the definition is debatable * Sounds simple, but what type of food? Junk food which is the cheapest? If you can’t afford T-bone steaks, it doesn't mean you're in poverty. But you can't afford canned meat? * Same thing with clothing. What type? If you can afford a regular winter coat but not a canada goose one, are you in poverty? Now, we have to dive deep into poverty and Income inequality… Attacking Poverty & Income Inequality: There are 2 strategies to attack poverty… Relief Strategies * Takes care of immediate problem, it won't get RID of poverty but helps them in the now (TEMPORARY FIX) * E.g - Food banks, Government transfer payments ( E.g- Child tax benefit, money given to households based on income and children, Old Age Pension, Income Supplement, Healthcare transfer payment) Structural Strategies * Aim to eliminate or minimize poverty * E.g - Education (more education = more educated workforce = more income), Daycare (government pays for daycare for them to go to make more money), Increasing Employment, relocating people to more economically stable places (places where demand of their job is needed more to make more money) Now we will talk about how the transfer of payment is allocated into the Canadian welfare society… The Canadian Welfare Society: Welfare Society: when government plays a huge role to ensure economic well being of citizens (any country that focuses on the well being of their citizens) Transfer payments: * Government collects all the money from households (income taxes) and then they distribute that money * E.g- Canada Pension, Child Tax Benefit, Canada Health transfer Moving onto Transfer Payments and Income Equity.. Transfer Payments & Income Equity: * This is split into sections of lowest to highest income earners in brackets of 20% * The goal of the transfer payments for first column is that the lowest income earners get the most amount of money that's handed out * The point of income being handed out is to get it to the lowest income distributors * The lower income households, majority of their income comes from the government lend money * The higher income households, the government lend money don’t take up most of their income Moving onto the principles of taxation… There are 2 main principles of taxation in terms of fairness that they can follow * Benefits Received Method: people that benefit from government provided goods/services should pay for it E.g- Gasoline taxes go towards roadwork (the people who pay this tax are the ones who use the road) * Ability To Pay: those who make more income should pay more tax (the more you make, the more you pay in taxes) E.g- Personal Income Tax Now we are going to relate these concepts to income… Taxes and Income: 3 easy ways that taxes are related to income… * Progressive Taxes: increase as a proportion of income as income goes up (the more you make, the more you give towards this tax) E.g - Income of $10,000 pays 10% (1000), income of $20,000 pays %15 (3000) * Proportional Taxes: the proportion of your income that goes towards taxes is CONSTANT E.g - Income of $10,000 pays 6% (600), income of $20,000 pays %6 (1200) * NOTICE: the money still goes up that you pay towards taxes, the rate just stays the SAME * Regressive Taxes: the more you make, the smaller the percentage your income goes towards taxes E.g - Income of $10,000 pays 8% (800), income of $20,000 pays %6 (1200) REAL LIFE EXAMPLE: HST tax, Carbon tax * A person that makes $20,000 is gonna spend all their money on necessities, etc. and all that money will get taxed so they spend 100% in taxes, but a person that makes $100,000 that spends 80% of their income, only 80% of their income will be taxed * Same thing with carbon tax, lower income households will have fuel and gas used up on more of their income, and for higher income households, even if they drive more they still pay less because their income is significantly higher * If you look at the personal income taxes paid, they are progressive meaning it goes up the more money you make