Income Inequality

This activity will usually be helpful for the last part of "Introduction to Microeconomics" course, while teaching and discussing situations of government interventions, tax scheme for the country, Lorenz curve and Gini coefficient, and the justification for government intervention. The discussion could be helpful for students in all levels- undergraduate or graduate students who are either introduced to the principles of economics for the first time, or taking economics courses towards policy jobs in the future. and could be really helpful to show how the economic theory is highly related to real life problems and situations. This discussion provides a review of how to build the Lorenz curve, but moreover- provide a deep discussion about social value, what are the possible political and social consequences of inequality in the economy and should policy makers take steps to change it.

Expected Student Learning Outcomes

This activity should enable students to understand how the Lorenz curve is built, based on data on a country's distribution of income and what are the possible policies (as progressive tax system) to improve the situation.

Information Given to Students

Here is the current distribution of wealth for your country ChaChaLand:

Lowest quintile 3.8%

Second quintile 9.6%

Third quintile 12.2%

Fourth quintile 27.1%

Fifth (highest) quintile 47.3%

Plot the Lorenz curves for your country. At this point, you are required to vote about a possible increase in the progressivity of a nation's income tax code. Which is the most important consideration when voting on a possible increase?

- The level of income inequality.

- Whether an increase in the tax rate substantially reduces work and investment effort of the rich.

- Whether an increase in government transfers reduces the work effort of recipients.

- Whether the rich became rich by inheriting wealth and other advantages or whether they worked harder to succeed than did other people who had similar opportunity.

The discussion can include the economics aspects of inequality, in addition to the social and political aspects of it. The facilitator should encourage the debate- if the students support progressive tax- how would they react if their own income would be reduced. If they support keeping the level of inequality- would they be concerned about social anger from the poor to the rich?

The activity will practically implement for the students the concepts of equality (45 degrees line), inequality and measurements of inequality. Before the activity, students can also be introduced to the following paragraph (based on course text book, as in: http://www.saylor.org/books/) and will be required to read up to the end of the chapter:

"The primary evidence of growing inequality is provided by census data. Households are asked to report their income, and they are ranked from the household with the lowest income to the household with the highest income. The Census Bureau then reports the percentage of total income earned by those households ranked among the bottom 20%, the next 20%, and so on, up to the top 20%. Each 20% of households is called a quintile. The bureau also reports the share of income going to the top 5% of households."

In addition, this youtube film is very helpful in explaining how to build a Lorenz curve: https://www.youtube.com/watch?v=sRbERagWsPU

As for the social and political discussion, students could be required to read the article: "Building a Better America−−One Wealth Quintile at a Time" by Michael I. Norton and Dan Ariely: file:///C:/Users/galiteiz/Downloads/norton%20ariely.pdf, to discuss the views of people on progressive tax and inequality