chapter 8 income distributionthe canadian welfare society canada has a mixed economy therefore it...
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Chapter 8 – Income
DistributionPart II
In a nutshell so far..
1. Factors that determine wages
Risk taking
Ability
Wealth
2. In Canada, poverty is usually defined in relation to the average Canadian income and expenditures on necessities
3. The poverty line, which depends on household type, is the income level below which a household is classified as poor
4. Poverty is mot prevalent among unattached (single) individuals (esp. women), single-parent families (esp those headed by women) and those under 25 and over 64 years old
5. Other possible measures based on absolute definition of poverty have been proposed by Canadian gov’t but have yet to be officially adopted
The Canadian Welfare Society
Canada has a mixed economy therefore it can be described as a welfare
society
Government plays a major role in attempting to ensure the well-being of its
citizens
How does the government address the specific goal of income equity?
Transfer payments
Income taxes
Transfer Payments
1. Transfer Payments
a) Universality vs Means Testing
b) Impact on Income Distribution
2. Taxes and Income Equity
3. Taxes and Income
Transfer Payments
1. Transfer Payments
a) Universality vs Means Testing
b) Impact on Income Distribution
2. Taxes and Income Equity
3. Taxes and Income
Universality vs Means Testing
Principle of Universality
Benefits apply to all individuals, no matter what their incomes
Advantage: treating everyone in the same way; transfer payments are
the same to every individual
Drawback/Disadvantage: In order to provide significant help to those
who need it the most, a large sum of money has to be paid to ALL
recipients
Means Testing
Transfer payments vary according to recipient’s income
Advantage: benefit can be directed to those who need them most
Poor households receive highest payments
Disadvantage: Gov’t may use means testing to limit spending by
narrowing qualifications
Transfer Payments
1. Transfer Payments
a) Universality vs Means Testing
b) Impact on Income Distribution
2. Taxes and Income Equity
3. Taxes and Income
Impact on Income Distribution
Government transfer payments to individual households are between 10-20%
of household’s income
Many of them go to unattached individuals vs families
The poorer % households get more than the richer 20% of households
Payments have some impact on equalizing the distribution of income, but it is
not perfect
Transfer Payments and Income Equity
Transfer payments are now usually based on the principle of means testing
rather than universality.
Transfer payments are greatest as a percent of income for the poorest fifth of
households, but the second-poorest fifth of households receives the largest
share of these payments.
Transfer Payments and Income Equity (b)
Lowest 20%Second 20%Third 20%Fourth 20%Highest 20%
Average of Total
Average TransferPaymentsReceived(2006)
$7 2009 7008 4007 5005 100
7 600
Transfer Paymentsas a Percent ofTotal Income
(2006)
51.9%30.616.49.73.3
11.6
Share Receivedof Total Transfer
Payments(2006)
19.9%25.722.219.813.3
Transfer Payments
1. Transfer Payments
a) Universality vs Means Testing
b) Impact on Income Distribution
2. Taxes and Income Equity
3. Taxes and Income
Principles of Taxation
There are two main principles of taxation:
benefits received (e.g. gasoline taxes for roadwork)
ability to pay (e.g. personal income tax)
Benefits Received
Definition: The principle applied to taxation,
whereby taxes are geared to the benefits each
taxpayer gains from government activity
Government services are paid for in the same way
that products are bought and sold in the private
sector
For example, carbon tax on gasoline… is it
mandatory? What is it’s purpose?
If you drive more, you will gas up more. Therefore you
will be taxed more. Therefore when doing
maintenance on roads, you will be contributing more
to it.
Ability to Pay
Definition: the principle applied to taxation, whereby taxes vary in proportion
to a taxpayer’s financial resources
Difficult to measure this value
Should incidence factors play a role in determining in paying amount of taxes?
Do all individuals earning $40,000 have the same ability to pay taxes or should we
take into account of how many children they need to support as well?
Transfer Payments
1. Transfer Payments
a) Universality vs Means Testing
b) Impact on Income Distribution
2. Taxes and Income Equity
3. Taxes and Income (Next Class)
Taxes and Income
1. Progressive Taxes
2. Regressive Taxes
3. Proportional Taxes
Progressive Taxes
Definition: a tax that increases as a proportion of income as income increases
This is what the Canadian System uses to calculate the tax owed from
taxpayers
In a nutshell: as you make more money, you pay more taxes
Sanpellegrino makes $30,000 in 2017. How much does she pay in BC taxes?
Logan makes $50,000 in 2017. How much does he pay in BC taxes?
Sanpellegrino makes $30,000 in 2017. How much does she pay in BC taxes?
Logan makes $50,000 in 2017. How much does he pay in BC taxes?
Regressive Taxes
Definition: a tax that decreases as a proportion of income as income increases
It is the OPPOSITE of progressive taxes
In a nutshell: as you make more money, you pay less taxes
Ie: If I make $10,000 a year, I pay 10% in taxes. If I make $20,000 a year, I pay
5% in taxes
A regressive tax imposes a greater burden on the poor than on the rich
Regressive Taxes
Sales Tax
If sales tax is 7% for each person, a person with an income of
$10,000 is a greater proportion of the overall income VS a
person with an income of $100,000
Property Tax
Proportional Taxes
Definition: tax that remains constant as a proportion of income for all
incomes
In a nutshell: as you make more money, you pay the same taxes
Example: If I make $10,000, I pay 10% in taxes. If I make 1,000,000, I pay 10%
in taxes.
Application: Tithe of 10%
You Try!
Identify the following taxes as progressive, regressive or proportional and explain
your answers
a) A tax on inherited wealth
b) A 7% sales tax on all gods and services (with no accompanying tax credit)
c) A personal income tax with a constant marginal tax rate (and no deductions
from income)
d) A tax on residential housing
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