1 in this experiment, three people are assigned to a single role. find your teammates and sit...

1

Adhikari Samrachana 44 Firm 1 LeFebvre Nichole 51 Firm 10Aldrich Laura 61 Firm 1 Vogelgesang Jimmy 76 Firm 11Andrei Amanda 85 Firm 1 McClutchy Sarah 43 Firm 11Austin Ben 101 Firm 2 Nguyen Helen 21 Firm 11Barros Katie 106 Firm 2 Peterson Jenna 85 Firm 12Barrows Christie 133 Firm 2 Potter Sarah 64 Firm 12Bell David 128 Firm 3 Potter Dylan 16 Firm 12Bernier Arcand Philippe 104 Firm 3 Powell Andrew 67 Firm 13Boskovski Joe 92 Firm 3 Quinn Abigail 27 Firm 13Buchanan Joy 115 Firm 4 Rosenthal Evan 200 Firm 13Calise Cristina 59 Firm 4 Scott Katherine 19 Firm 14Chang Elizabeth 133 Firm 4 Shivers Tionya 109 Firm 14Choi Moses 68 Firm 5 Smith Julie 95 Firm 14Crail Drew 57 Firm 5 Smith Ross 30 Firm 15Crooks Ashley 83 Firm 5 Sriram Matt 162 Firm 15Dhar Sreyashe 102 Firm 6 Stegman Robert 60 Firm 15Diggs Amy 94 Firm 6 Stewart Michaela 83 Firm 16DiMaggio Vanessa 16 Firm 6 Sung Vannie 18 Firm 16Ennis Sean 78 Firm 7 Syeddah Ayesha 113 Firm 16Galvez Xondra 65 Firm 7 Sylaj Adelina 11 Firm 17Grape Richard 181 Firm 7 Thompson Jessica 83 Firm 17Guzenko Maria 44 Firm 8 Turcotte Scott 90 Firm 17Harning Brian 63 Firm 8 Tushe Isida 42 Firm 18Harris Brandon 64 Firm 8 Ueyama Kimberly 108 Firm 18Herman Lisa 72 Firm 9 Underwood Brittany 114 Firm 18Huerter John 171 Firm 9 Vasilyev Pavel 59 Firm 19Inden Margaret 105 Firm 9 Wang Jusy 115 Firm 19Johnson Jennifer 167 Firm 10 Yee Natalie 76 Firm 19Kotkin Rachel 93 Firm 10 Zhang Di 84 Firm 19

Student Score to Date RoleStudent Score to Date Role

In this experiment, three people are assigned to a single role. Find your teammates and sit together.

Remember: You are competing against the other teams.

2

The Players and the Goals

In this experiment, each team controls a firm that sells to a group of consumers.

FIRMS select what price to charge.

Lower price means consumers purchase more units.

Higher price means consumers purchase fewer units.

3

The Players and the Goals

Goal: make the most profit possible.

Profit = Revenue – Cost

(Price per unit) (Units sold)

(Tax per unit) (Units Sold)

($1) (Units sold)

4

Example

You will see a demand schedule like the one to the right.

The chart shows the number of units you will sell depending on what price you decide to charge.

For example, if you charge $0.50, you will sell 940 units.

You must choose what price to charge for your product so as to maximize your profit.

Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460

$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350

5

ExamplePrice per Unit Quantity Sold Price per Unit Quantity Sold

$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460

$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350

Suppose you charge $10.00 per unit.

How many units will you sell?

750

What is your revenue?

($10.00) (750) = $7,500What is your cost?

($1.00) (750) = $750

What is your profit?

$7,500 – $750 = $6,750

6


$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460

$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350



550


($20.00) (550) = $11,000What is your cost?

($1.00) (550) = $550


$11,000 – $550 = $10,450

7


$0.50 940 $15.50 640$1.00 930 $16.00 630$1.50 920 $16.50 620$2.00 910 $17.00 610$2.50 900 $17.50 600$3.00 890 $18.00 590$3.50 880 $18.50 580$4.00 870 $19.00 570$4.50 860 $19.50 560$5.00 850 $20.00 550$5.50 840 $20.50 540$6.00 830 $21.00 530$6.50 820 $21.50 520$7.00 810 $22.00 510$7.50 800 $22.50 500$8.00 790 $23.00 490$8.50 780 $23.50 480$9.00 770 $24.00 470$9.50 760 $24.50 460

$10.00 750 $25.00 450$10.50 740 $25.50 440$11.00 730 $26.00 430$11.50 720 $26.50 420$12.00 710 $27.00 410$12.50 700 $27.50 400$13.00 690 $28.00 390$13.50 680 $28.50 380$14.00 670 $29.00 370$14.50 660 $29.50 360$15.00 650 $30.00 350



350


($30.00) (350) = $10,500What is your cost?

($1.00) (350) = $350


$11,000 – $550 = $10,150

8

Example


Profit = $6,750


Profit = $10,450


Profit = $10,150

Of these three prices, $20.00 is the best price to charge.

9

Round 1 Price per Unit Quantity Sold Price per Unit Quantity Sold$0.50 137 $15.50 61$1.00 134 $16.00 59$1.50 131 $16.50 57$2.00 128 $17.00 55$2.50 125 $17.50 53$3.00 123 $18.00 51$3.50 120 $18.50 50$4.00 117 $19.00 48$4.50 114 $19.50 46$5.00 112 $20.00 44$5.50 109 $20.50 42$6.00 106 $21.00 40$6.50 104 $21.50 39$7.00 101 $22.00 37$7.50 98 $22.50 35$8.00 96 $23.00 34$8.50 93 $23.50 32$9.00 91 $24.00 31$9.50 88 $24.50 29

$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14

Choose the price you will charge for your product.

Every unit you sell costs you $1 to produce.

There is no tax.

10

Round 1

Firms' Profits

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

11

Statutory vs. Economic Tax Burden (or tax incidence)Statutory tax burden is the amount of tax collected from a person.

Economic tax burden is the amount of tax paid by a person.

Example:

• With no taxes, the price of gas is $3.00 per gallon.

• The government imposes a 50 cent per gallon tax on gasoline.

• The tax is collected from the producer.

• In response to the tax, the producer raises the price of gas to $3.50.

Who bears the statutory and economic burdens of the tax?

Statutory burden is on the producer, but economic burden is on the consumer.

12



Example:

• With no taxes, the price of gas is $3.00 per gallon.

• The government imposes a 50 cent per gallon tax on gasoline.

• The tax is collected from the producer.

• In response to the tax, the producer does not change the price of gas.


Statutory burden is on the producer and economic burden is on the producer.

13



Example:

• With no taxes, a person earns $50,000 per year.

• The government imposes a $10,000 income tax.

• The tax is collected from the worker.

• In response to the tax, the employer gives the worker a $5,000 raise.


Statutory burden is on the worker, but economic burden is shared between the worker and the employer.

14



Example:

• With no taxes, a person earns $50,000 per year.

• The government imposes a $10,000 Social Security tax.

• $5,000 of the tax is withheld from the worker’s pay check. The employer is required to pay the other $5,000.

• In response to the tax, the employer cuts the worker’s salary by $5,000.


Statutory burden is shared by the worker and employer, but economic burden is on the worker only.

15

Sales/Excise Tax

When the government imposes a tax, the price the consumer pays is no longer the same as the price the producer receives.

Example: $10 per unit tax.

The consumer pays $35 per unit, but the producer receives only $25 per unit.

We call the $35 the “consumer price” or the “price including tax” and the $25 the “producer price” or the “price excluding tax.”

16

Round 2: Statutory Tax Burden is on Consumers

In this round, consumers will pay an additional $5 per unit tax.

The price consumers pay is the price you charge (the producer price) plus $5.

The statutory tax burden is on the consumer.

17

Consumer Price Quantity Sold Consumer Price Quantity Sold$0.50 137 $15.50 61$1.00 134 $16.00 59$1.50 131 $16.50 57$2.00 128 $17.00 55$2.50 125 $17.50 53$3.00 123 $18.00 51$3.50 120 $18.50 50$4.00 117 $19.00 48$4.50 114 $19.50 46$5.00 112 $20.00 44$5.50 109 $20.50 42$6.00 106 $21.00 40$6.50 104 $21.50 39$7.00 101 $22.00 37$7.50 98 $22.50 35$8.00 96 $23.00 34$8.50 93 $23.50 32$9.00 91 $24.00 31$9.50 88 $24.50 29

$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14

Round 2

In this round, consumers will pay an additional $5 per unit tax.

The consumer price is the price you charge plus the $5 tax.

If you charge, $7, how many units will consumers buy?77


($7)(77) – ($1)(77) = $532

18

Round 2

Choose the price you will charge for your product (the price excluding tax).

The consumer price is the price you charge plus $5.

Every unit you sell costs you $1 to produce.


$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14

19

Round 2

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Round 1 (no tax) Round 2 (tax on consumer)

Consumer Price Producer Price

20

Round 2

Firms' Profits

$520

$540

$560

$580

$600

$620

$640

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

21

Round 3: Statutory Tax Burden is on Producers

In this round, producers will pay a $5 per unit tax for every unit they sell.

The price consumers pay is the price you charge.

The statutory tax burden is on the producer.

22

Round 3 Consumer Price Quantity Sold Consumer Price Quantity Sold$0.50 137 $15.50 61$1.00 134 $16.00 59$1.50 131 $16.50 57$2.00 128 $17.00 55$2.50 125 $17.50 53$3.00 123 $18.00 51$3.50 120 $18.50 50$4.00 117 $19.00 48$4.50 114 $19.50 46$5.00 112 $20.00 44$5.50 109 $20.50 42$6.00 106 $21.00 40$6.50 104 $21.50 39$7.00 101 $22.00 37$7.50 98 $22.50 35$8.00 96 $23.00 34$8.50 93 $23.50 32$9.00 91 $24.00 31$9.50 88 $24.50 29

$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14

In this round, producers will pay a $5 per unit tax.

Your cost per unit is now $6 ($1 per unit to produce plus $5 per unit tax).

If you charge, $7, how many units will consumers buy?101


($7)(101) – ($6)(77) = $245

23

Round 3


The consumer price is the price you charge.

Every unit you sell costs you $6.


$10.00 86 $25.00 28$10.50 84 $25.50 26$11.00 81 $26.00 25$11.50 79 $26.50 23$12.00 77 $27.00 22$12.50 74 $27.50 20$13.00 72 $28.00 19$13.50 70 $28.50 18$14.00 68 $29.00 16$14.50 66 $29.50 15$15.00 64 $30.00 14

24

Round 3

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Round 2 (tax on consumer) Round 3 (tax on producer)


25

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Round 2 (tax on consumer) Round 3 (tax on producer)

Consumer Tax Burden (per unit) Producer Tax Burden (per unit)

Round 3

26

Round 3

Firms' Profits

$500

$520

$540

$560

$580

$600

$620

$640

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

27

Luxury versus Necessity

Consumption of luxury goods is more sensitive to price changes.

Consumption of necessity goods is less sensitive to price changes.Example:

• At a price of $10 per ticket, Howie will see 10 movies per year.

• If the price rises to $12, Howie will cut back to 5 movies per year.

20% rise in price results in a 50% reduction in consumption

Howie’s consumption is highly sensitive to price changes.

For Howie, movies are a luxury good.

28

Luxury versus Necessity

Consumption of luxury goods is more sensitive to price changes.

Consumption of necessity goods is less sensitive to price changes.Example:

• At a price of $10 per ticket, Rob will see 10 movies per year.

• If the price rises to $12, Rob will cut back to 9 movies per year.

20% rise in price results in a 10% reduction in consumption

Rob’s consumption is less sensitive to price changes.

For Rob, movies are a necessity good.

29


$10.00 310 $25.00 63$10.50 304 $25.50 52$11.00 298 $26.00 41$11.50 291 $26.50 30$12.00 285 $27.00 19$12.50 278 $27.50 8$13.00 271 $28.00 0$13.50 264 $28.50 0$14.00 257 $29.00 0$14.50 250 $29.50 0$15.00 243 $30.00 0

Round 4




30

Round 4

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Round 3 (necessity good) Round 4 (luxury good)


31

($1.00)

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

Round 3 (necessity good) Round 4 (luxury good)


Round 4

32

Round 4

Firms' Profits

$2,160

$2,180

$2,200

$2,220

$2,240

$2,260

$2,280

$2,300

$2,320

$2,340

$2,360

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

33

How to increase tax revenue

In an attempt to increase tax revenue, the government increases the tax from $5 per unit to $15 per unit.

34


$10.00 310 $25.00 63$10.50 304 $25.50 52$11.00 298 $26.00 41$11.50 291 $26.50 30$12.00 285 $27.00 19$12.50 278 $27.50 8$13.00 271 $28.00 0$13.50 264 $28.50 0$14.00 257 $29.00 0$14.50 250 $29.50 0$15.00 243 $30.00 0

Round 5




35

Round 5

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

Round 4 ($5 tax) Round 5 ($15 tax)


36

($2.00)

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00



Round 5

37

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000


Total Tax Revenue

Round 5

38

Round 5

Firms' Profits

$0

$100

$200

$300

$400

$500

$600

$700

$800

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

39

How to increase tax revenue

In an attempt to increase tax revenue even further, the government increases the tax from $15 per unit to $25 per unit.

40


$10.00 310 $25.00 63$10.50 304 $25.50 52$11.00 298 $26.00 41$11.50 291 $26.50 30$12.00 285 $27.00 19$12.50 278 $27.50 8$13.00 271 $28.00 0$13.50 264 $28.50 0$14.00 257 $29.00 0$14.50 250 $29.50 0$15.00 243 $30.00 0

Round 6




41

Round 6

($5.00)

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00



42

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00



Round 6

43

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Round 4 ($5 tax) Round 5 ($15 tax) Round 6 ($25 tax)

Total Tax Revenue

Round 6

44

Round 6

Firms' Profits

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

45

Does it work this way in the real world?

46

Who bears the economic burden of the Social Security tax?

47

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%19

5119

5219

5319

5419

5519

5619

5719

5819

5919

6019

6119

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05

Growth in Median Real Gross Wages (2 year rolling average)

Source: Social Security Administration and the U.S. Bureau of Labor Statistics.

48

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%19

5119

5219

5319

5419

5519

5619

5719

5819

5919

6019

6119

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05

Growth in Median Real Gross Wages (2 year rolling average)

Average annual wage growth when SS tax increases = 1.0%

Average annual wage growth when SS tax does not change = 1.3%

Source: Social Security Administration and the U.S. Bureau of Labor Statistics.

49

Average annual wage growth when SS tax increases = 1.0%

Average annual wage growth when SS tax does not change = 1.3%

Increasing SS tax slows average wage growth by 0.3%.

When SS tax rate increases, it increases (on average) by 0.3%

Employer passes on employer’s half of SS tax increases to the worker in the form of lower wages.

50

Does increasing Social Security tax increase Social Security tax

revenues?

51

Source: U.S. Bureau of Labor Statistics.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%19

56

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

OASDI-HI Marginal Tax Rate (right axis)

52

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Growth in OASDI-HI Real Tax Revenue per Capita (left axis, 5-year moving average)

OASDI-HI Marginal Tax Rate (right axis)

Source: U.S. Bureau of Labor Statistics.

53

Does increasing the capital gains tax rate increase tax revenues?

54

0%

5%

10%

15%

20%

25%

30%

35%

40%

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Capital Gains Tax Rate

Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee of the United States Congress.

55

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Billi

ons

1992

$

Capital Gains Tax Revenues (left axis) Capital Gains Tax Rate (right axis)

Source: Gwartney, J.D. and R.G. Holcombe, 1997. Optimal Capital Gains Tax Policy. Report to the Joint Economic Committee of the United States Congress.

56

Two possible goals for tax policy:

1. Raise revenue.

2. Redistribute income.

57

Can we tax the rich by taxing things that rich people buy?

58

1990 Deficit Reduction Law: The “Luxury Tax”

Goal: Raise tax revenue by raising taxes on “the rich.”

Means:10% excise tax on recreational planes.

Result: 80 fewer planes sold$130 million lost sales480 lost jobs

Estimated tax revenue: $6 million.

Actual tax revenue: $530,000.

Economic burden of the tax fell almost entirely on “the poor.”

Government gained $1,100 for every job a worker lost.Source: Joint Committee on Taxation, “Methodology and Issues in the Revenue Estimating Proecess” (JCX-2-95), January 23, 1995.

59

Can we get more money from the rich by taxing their income at a

higher rate?

60

In early 1920’s, the top income tax rate was decreased from 73% to

24%.

61

Top Income Tax Rate Cut from 73% to 24% in Early 1920’s

62


70%.

63


64


28%.

Lower bracket income taxes were also decreased.

65


66

What to do?

The rich are getting richer while the poor are getting poorer.

67

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $

15,0

00

$15,0

00 -

$25,0

00

$25,0

00 -

$35,0

00

$35,0

00 -

$50,0

00

$50,0

00 -

$75,0

00

$75,0

00 -

$100,0

00

> $

100,0

00

% o

f H

ou

seh

old

s

1980

Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.

Income Distribution for 1980 (in 2003$)

68

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $

15,0

00

$15,0

00 -

$25,0

00

$25,0

00 -

$35,0

00

$35,0

00 -

$50,0

00

$50,0

00 -

$75,0

00

$75,0

00 -

$100,0

00

> $

100,0

00

% o

f H

ou

seh

old

s

1980 2003


Income Distribution for 2003 (in 2003$)

69

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of the Popuation

% o

f T

ota

l In

com

e

1980 2003


In 1980, the lower 80% of households earned 56% of all income.

By 2003, the lower 80% of households earned only 50% of all income.

70

In which world would each person rather live?

(prices are the same in the two worlds)

Household Income in World #1 Household Income in World #2Person 1 $32,000 $40,000Person 2 $33,500 $41,875Person 3 $35,000 $43,750Person 4 $36,500 $45,625Person 5 $38,000 $47,500Person 6 $39,500 $49,375Person 7 $41,000 $51,250Person 8 $42,500 $53,125Person 9 $44,000 $77,000

Person 10 $45,500 $79,625

In world #1, Person 10 earns 11% of all income.

In world #2, Person 10 earns 15% of all income.

71

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of the Popuation

% o

f T

ota

l In

com

e

World #1 World #2

In World #1, the lower 80% of households earned 80% of all income.In World #2, the lower 80% of households earned only 70% of all income.

72

In which world would each person rather live?

(prices are the same in the two worlds)

World #3’s income distribution is the same as World #1’s.

Household Income in World #1 Household Income in World #2 Household Income in World #3Person 1 $32,000 $40,000 $6,400Person 2 $33,500 $41,875 $6,700Person 3 $35,000 $43,750 $7,000Person 4 $36,500 $45,625 $7,300Person 5 $38,000 $47,500 $7,600Person 6 $39,500 $49,375 $7,900Person 7 $41,000 $51,250 $8,200Person 8 $42,500 $53,125 $8,500Person 9 $44,000 $77,000 $8,800

Person 10 $45,500 $79,625 $9,100

74

Impact of a Change in the Estate Tax on Firms With 0-4 Employees

100,000

102,000

104,000

106,000

108,000

110,000

112,000

114,000

116,000

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Year

Nu

mb

er o

f F

irm

s

No Change in Estate Tax Estate Tax per Decedent Doubles

75

Impact of a Change in the Estate Tax on Firms With 10-19 Employees

100,000

102,000

104,000

106,000

108,000

110,000

112,000

114,000

116,000


Year

Nu

mb

er o

f F

irm

s


76

Impact of a Change in the Estate Tax on Firms With 500+ Employees

100,000

102,000

104,000

106,000

108,000

110,000

112,000

114,000

116,000


Year

Nu

mb

er o

f F

irm

s


7777

($30,000)

($20,000)

($10,000)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration

Expected annual Social Security tax payments

Expected annual Social Security benefits

Expected Tax and Benefits for Median Worker

7878

($30,000)

$20,000

$70,000

$120,000

$170,000

$220,000

$270,000

$320,000

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77

Compiled from data published in 2003 Statistical Abstract of the United States, U.S. Bureau of the Census, and provided by the Social Security Administration

Expected annual Social Security tax payments

Expected annual benefits from privatized accountThis chart assumes that 100% of the

worker’s current Social Security taxes are diverted to a private investment account yielding an 8% annual return.

1 in this experiment, three people are assigned to a single role. find your teammates and sit...

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