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58 ❖ Chapter 20/Income Inequality and Poverty
30. Since the early 1970s, welfare benefits have declined,
a.
which is largely due to the success of the negative income tax program.
b.
which is largely due to the success of private charities.
c.
yet the percentage of children living with only one parent has increased.
d.
and the percentage of children living with only one parent has decreased.
31. A common criticism of government programs that are designed to assist the poor is that
a.
those who receive assistance rarely meet the criterion for eligibility.
b.
the majority of those below the poverty line refuse to accept government assistance.
c.
they create incentives for people to become "needy."
d.
they typically account for a majority of annual government expenditures.
32. Unemployment insurance benefits is a type of
a.
in-kind transfer.
b.
negative income tax payment.
c.
property income.
d.
welfare payment.
33. Which of the following is an example of a welfare program?
a.
Temporary Assistance for Needy Families (TANF).
b.
Capital Gains Tax (CGT).
c.
Life Cycle Transfers (LCT).
d.
North American Free Trade Agreement (NAFTA).
34. In the Temporary Assistance for Needy Families program, most families
a.
must have both parents in the home to qualify.
b.
are female head-of-household families in which the father is absent.
c.
have adult children with disabilities living at home.
d.
are ineligible to receive assistance from other support programs.
35. Anti-poverty programs
a.
encourage saving among recipient groups.
b.
impose a very low marginal tax rate on income.
c.
are only made available to those with no other source of income.
d.
may discourage the poor from escaping poverty on their own.
Chapter 20/Income Inequality and Poverty ❖ 59
36. Which of the following statements is not correct?
a.
Welfare programs may encourage illegitimate births.
b.
The decline in welfare benefits since the 1970s has been associated with a decline in the percentage
of children living with a single parent.
c.
Welfare programs may reduce incentives for people to work.
d.
A negative income tax program uses tax revenues collected from high-income families to provide
cash subsidies to low-income families.
37. For which of the following programs can a person qualify solely by having a low income?
a.
both Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI)
b.
Temporary Assistance for Needy Families (TANF) but not Supplemental Security Income (SSI)
c.
Supplemental Security Income (SSI) but not Temporary Assistance for Needy Families (TANF)
d.
neither Temporary Assistance for Needy Families (TANF) nor Supplemental Security Income (SSI)
38. The U.S. welfare system was revised by a 1996 law that
a.
consolidated all of the previous assistance programs into a single program.
b.
limited the amount of time that people could receive assistance.
c.
said it was no longer necessary for poor people to demonstrate an additional “need,” such as small
children or a disability, to qualify for assistance.
d.
turned all federally-run welfare programs over to the states.
39. Poor families are eligible for financial assistance, without having to demonstrate any additional “need,”
a.
under the current welfare system and under a negative income tax.
b.
under the current welfare system but not under a negative income tax.
c.
under a negative income tax but not under the current welfare system.
d.
under neither the current welfare system nor under a negative income tax.
40. Which of the following is not an example of a welfare program?
a.
Supplemental Security Income (SSI)
b.
Temporary Assistance for Needy Families (TANF)
c.
food stamps
d.
minimum wage laws
60 ❖ Chapter 20/Income Inequality and Poverty
41. A disadvantage associated with an Earned Income Tax Credit (EITC) program to reduce poverty is that it
a.
encourages illegitimate births because single women with children receive higher payments.
b.
rewards laziness because it provides payments to those with low incomes regardless of their work
effort.
c.
does not help the poor who are unemployed.
d.
creates unemployment by increasing the wage paid to unskilled workers above the equilibrium
wage.
42. Which of the following is not correct?
a.
Welfare is a broad term that includes a variety of government programs designed to help poor
people.
b.
Since the early 1970s, welfare benefits adjusted for inflation have increased, as has the percentage
of children living with only one parent.
c.
Critics of welfare programs argue that they can create incentives for unmarried women to have
children.
d.
Supporters argue that welfare doesn’t cause the decline of two-parent families.
Scenario 20-2
Suppose the government implemented a negative income tax and used the following formula to compute a
family’s tax liability:
Taxes owed = (1/4 of income) - $20,000
43. Refer to Scenario 20-2. A family earning $60,000 before taxes would have how much after-tax income?
a.
-$5,000
b.
$25,000
c.
$55,000
d.
$65,000
44. Refer to Scenario 20-2. A family earning $90,000 before taxes would have how much after-tax income?
a.
$12,500
b.
$17,500
c.
$87,500
d.
$92,500
45. Refer to Scenario 20-2. This negative income tax would guarantee what minimum level of income to every
family?
a.
$5,000
b.
$10,000
c.
$20,000
d.
$40,000
Chapter 20/Income Inequality and Poverty ❖ 61
46. Refer to Scenario 20-2. Below what level of income would families start to receive a subsidy from this nega-
tive income tax?
a.
$20,000
b.
$60,000
c.
$80,000
Scenario 20-3
Suppose the government implemented a negative income tax and used the following formula to compute a
family’s tax liability:
Taxes owed = (1/3 of income) - $15,000
47. Refer to Scenario 20-3. A family earning $60,000 before taxes would have how much after-tax income?
a.
$5,000
b.
$15,000
c.
$55,000
d.
$65,000
48. Refer to Scenario 20-3. A family earning $90,000 before taxes would have how much after-tax income?
a.
$65,000
b.
$75,000
c.
$85,000
d.
$105,000
49. Refer to Scenario 20-3. This negative income tax would guarantee what minimum level of income to every
family?
a.
$5,000
b.
$10,000
c.
$15,000
d.
$30,000
50. Refer to Scenario 20-3. Below what level of income would families start to receive a subsidy from this nega-
tive income tax?
a.
$15,000
b.
$30,000
c.
$45,000
d.
$60,000
62 ❖ Chapter 20/Income Inequality and Poverty
51. A negative income tax system is designed to
a.
provide in-kind benefits to the poor.
b.
provide a minimum income to the poor.
c.
reduce taxes on the rich when their incomes surpass the maximum income tax bracket.
d.
subsidize food consumption in poor families.
52. A tax provision that works much like a negative income tax is the
a.
Earned Income Tax Credit (EITC).
b.
Temporary Assistance for Needy Families (TANF).
c.
deduction for charitable contributions.
d.
mortgage interest rate deduction.
53. A negative income tax system would
a.
make taxes more regressive.
b.
sever the link between tax policy and income distribution.
c.
collect from high-income households and give transfers to low-income households.
d.
eliminate progressive tax rates.
54. The only qualification to receive government assistance under a negative income tax is
a.
pre-school children.
b.
to be enrolled in job training.
c.
a working head-of-household.
d.
a low income.
55. Which of the following formulas is most representative of a negative income tax proposal?
a.
Taxes Owed = (1/4 of Income) $2
b.
Taxes Owed = (1/2 of Income) 3/4
c.
Taxes Owed = (1/2 of Income) + $10,000
d.
Taxes Owed = (1/3 of Income) - $10,000
56. Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes
Owed = (1/3 Income) - 10,000. If a family doesn't earn any income, how does the negative income tax affect
it?
a.
It will receive an income subsidy of $1,000.
b.
It will receive an income subsidy of $3,000.
c.
It will receive an income subsidy of $10,000.
d.
It will not be affected at all, since the negative income tax requires a family to earn income.
Chapter 20/Income Inequality and Poverty ❖ 63
57. Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes
Owed = (1/3 Income) - 10,000. A family that earns an income of $60,000 will
a.
pay $10,000 in taxes.
b.
receive an income subsidy of $3,000.
c.
receive an income subsidy of $10,000.
d.
neither pay taxes nor receive an income subsidy.
58. Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes
Owed = (1/3 Income) - 10,000. A family that earns an income of $30,000 will
a.
neither pay taxes nor receive an income subsidy.
b.
receive an income subsidy of $500.
c.
pay $1,000 in taxes.
d.
pay $600 in taxes.
59. Which of the following is not a characteristic of the Earned Income Tax Credit (EITC)?
a.
It does not discourage recipients from working.
b.
It is less distortionary than other anti-poverty programs.
c.
It helps the disabled who cannot work.
d.
It applies only to the working poor.
60. Which of the following is not correct?
a.
A negative income tax only applies to working people, so it encourages people to get full-time
work.
b.
Supporters advocate the use of the Earned Income Tax Credit as a way to help the working poor.
c.
A negative income tax subsidizes the incomes of poor people.
d.
An advantage of a negative income tax is that it is not based on the number of children, so it does
not provide incentives for unmarried women to have children.
61. Which of the following is not an example of in-kind transfers?
a.
food stamps
b.
Medicaid
c.
the Earned Income Tax Credit
d.
housing vouchers
64 ❖ Chapter 20/Income Inequality and Poverty
62. Medicaid and food stamps are
a.
available only to the elderly.
b.
forms of in-kind assistance.
c.
forms of cash assistance.
d.
transfer payments.
63. In-kind transfers are politically popular because
a.
they provide high quality food and shelter.
b.
they provide cash.
c.
allow resale of food stamps for cash, if needed.
d.
the public believes that the aid is not going to support alcohol and drug addiction.
64. Which of the following is an advantage of an in-kind transfer in comparison to a cash payment?
a.
In-kind transfers cost less to administer than cash transfers.
b.
In-kind transfers restrict the use of the benefit; thus, recipients receive necessities such as food and
health care.
c.
In-kind transfers are more efficient than cash transfers.
d.
In-kind transfers give the recipient more utility than cash transfers.
65. Relative to direct cash payments, in-kind transfers have the advantage of being
a.
more politically popular.
b.
more efficient.
c.
more respectful of the poor.
d.
of a higher dollar value than cash payments.
66. An example of an in-kind transfer to the poor is
a.
the negative income tax.
b.
the Earned Income Tax Credit (EITC).
c.
Medicaid.
d.
Temporary Assistance for Needy Families (TANF).
67. Which of the following is not correct?
a.
Toys for Tots, a program that collects new toys to distribute to poor children at Christmas, is an
example of an in-kind transfer.
b.
Supporters advocate the use of in-kind transfers because they restrict the ability of recipients to
purchase alcohol and drugs.
c.
Critics argue that in-kind transfers are inefficient and disrespectful.
d.
In order for a program to qualify as an in-kind transfer, it must have government approval.
Chapter 20/Income Inequality and Poverty ❖ 65
TRUE/FALSE
1. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure
that resources are allocated fairly.
2. When the government enacts policies to make the distribution of income more equitable, it distorts incentives,
alters behavior, and makes the allocation of resources less efficient.
3. The United States has more income inequality than Japan, Germany, and Canada.
4. The United States has more income inequality than Brazil and South Africa.
5. The United States has a more unequal income distribution than many other developed countries such as Japan
and Canada.
6. The United States has a more equal income distribution than many developing economies such as Mexico,
South Africa, and Brazil.
7. Among all countries in the world, the United States has the most income inequality.
8. In the United States in 2008, the bottom fifth of the income distribution had incomes below $19,250.
9. The top 5 percent of U.S. annual family income in 2008 was $200,000 or more.
10. A U.S. family earning $80,000 would be in the top 20 percent of income distribution in 2008.
66 ❖ Chapter 20/Income Inequality and Poverty
11. An income distribution may not give an accurate picture of the standard of living for the poor because it does
not include in-kind transfers.
12. Since 1970 the United States’ income distribution has become more equal.
13. In 2008 the top 20% of income earners accounted for over 80% of all income received by United States’ fami-
lies.
14. In 2008 the top 5 percent of income earners accounted for over 50% of all income received by United States’
families.
15. In the United States from 1935 to 2008 the share of total income earned by the bottom fifth of income earners
rose and then fell.
16. Despite continued growth in average income since the early 1970s, the poverty rate has not declined below the
level reached in 1973.
17. Even though the average income in the United States has continued to grow, the poverty rate has increased to
over 20% since the early 1970s.
18. The measured poverty rate may not reflect the true extent of economic deprivation because it does not include
some forms of government assistance.
19. The poverty line is set by the government so that 10 percent of all families fall below that line and are thereby
classified as “poor.”
20. The poverty line is an absolute standard and is based on the cost of providing an adequate diet.
Chapter 20/Income Inequality and Poverty ❖ 67
21. The poverty line is based on the percentage of people who cannot afford an adequate diet.
22. The poverty rate is the percentage of the population whose family income falls below the poverty line..
23. The poverty rate is an absolute level of income set by the federal government for each family size. A family
with income below this rate is deemed to be in poverty.
24. The elderly represent the largest demographic group in poverty.
25. About half of black and Hispanic children in female-headed households live in poverty.
26. Standard measurements of the degree of income inequality take both money income and in-kind transfers into
account.
27. The economic life cycle describes how young people usually have higher savings rates than middle-aged peo-
ple.
28. Many economists believe that a family bases its spending decisions on its permanent, or average, income ra-
ther than on transitory income.
29. Most economists believe that a family bases its spending decisions on its transitory income.
30. About four out of five millionaires in the United States earned their money rather than inherited it.
68 ❖ Chapter 20/Income Inequality and Poverty
31. Fewer than three percent of families are poor for eight or more years.
32. There is very little economic mobility in the United States, which means that once a family is poor, it is very
likely to remain poor for at least a decade.
33. According to a study by Michael Cox and Richard Alm, consumption per person in the richest 20% of house-
holds was only 2.1 times consumption per person in the poorest 20% of households.
34. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of everyone
in society.
35. The utilitarian justification for redistributing income is based on the assumption of diminishing marginal util-
ity.
36. John Rawls, who developed the way of thinking called liberalism, argued that government policies should be
aimed at maximizing the sum of utility of everyone in society.
37. If a government could successfully achieve the maximin criterion, each member of society would have an
equal income.
38. A follower of liberalism would not support a redistribution of income but rather would focus on equalizing
opportunities.
39. The maximin criterion is the idea that the government should aim to maximize the well-being of the worst-off
person in society.
Chapter 20/Income Inequality and Poverty ❖ 69
40. According to libertarians, the government should redistribute income from rich individuals to poor individuals
to achieve a more equal distribution of income.
41. Libertarians believe that the government should enforce individual rights to ensure that all people have the
same opportunities to use their talents to achieve success.
42. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal outcomes.
43. Critics argue that a disadvantage of minimum-wage laws is that they do not effectively target the working poor
because many minimum-wage workers are the teenage children of middle-income families.
44. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax program.
45. The Supplemental Security Income (SSI) program focuses on the poor who are sick or disabled.
46. One existing government program that works much like a negative income tax is the Earned Income Tax
Credit.
47. One existing government program that works much like a negative income tax is Medicaid.
48. An advantage of a negative income tax is that it does not encourage the breakup of families because the only
criterion for assistance is family income.
49. Critics argue that a disadvantage of the Earned Income Tax Credit is that it does not effectively target the
working poor because many recipients are the teenage children of middle-income families.
70 ❖ Chapter 20/Income Inequality and Poverty
50. A disadvantage of the Earned Income Tax Credit (EITC) program is that it does not help alleviate poverty due
to unemployment, sickness, or other inability to work.
SHORT ANSWER
1. Explain the relationship between labor earnings and the distribution of income.
2. What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.
3. Given the table shown, which country has a more equal income distribution? Explain your answer.
Country
Bottom Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Top Fifth
Country A
9.0%
13.5%
17.5%
22.9%
37.1%
Country B
4.8%
10.5%
16.0%
23.5%
45.2%
Chapter 20/Income Inequality and Poverty ❖ 71
4. Explain what information is contained in the poverty rate statistic. Are there problems in using an absolute
scale to measure poverty? If so, explain them.
5. Compare and contrast the "life cycle" hypothesis and the "permanent income" hypothesis. What are their re-
spective implications for inequality in the income distribution?
6. Explain the concept of diminishing marginal utility, and describe the role that it plays in the utilitarian argu-
ment for the redistribution of income.
7. Explain how a "leaky bucket" can be used to illustrate the utilitarian argument that governments should not
attempt to completely equalize individual incomes.
72 ❖ Chapter 20/Income Inequality and Poverty
8. Briefly describe the three prominent schools of thought in political philosophy. Identify one of the most well-
known philosophers in each school.
9. The table below reflects the levels of total utility received from income for each of four members of a society.
Income
Peter
Paul
Mary
Jane
$1
15
32
20
16
$2
29
61
38
30
$3
42
87
54
42
$4
54
110
68
52
$5
65
130
80
60
$6
75
147
90
66
$7
84
161
98
70
$8
92
172
103
72
a.
Assume that the society has the following income distribution:
Peter $3
Paul $7
Mary $5
Jane $3
Is it possible for the government to increase total aggregate utility by redistributing income among
members of society? Explain your answer.
b.
Assume that the government has $19 to allocate among the four members of society. (Assume that
no one has any income to start with.) If the government is interested in distributing income in a
way that maximizes aggregate total utility, how should it distribute the $19 of income?
c.
Does the table above describe a situation characterized by diminishing marginal utility? Explain
your answer.
Chapter 20/Income Inequality and Poverty ❖ 73
10. Assume that the government proposes a negative income tax that calculates taxes owed by the following for-
mula,
Taxes Owed = (1/3 Income) - $10,000.
Compute the tax that would be owed given each level of income.
a.
$120,000
b.
$90,000
c.
$60,000
d.
$30,000
e.
$0
11. Assume that the government proposes a negative income tax that calculates taxes owed by the formula, Taxes
Owed = (a Income) - b. A family with an income of $40,000 pays $5,000 in taxes, and a family with an in-
come of $12,000 receives an income subsidy of $2,000.
a.
What is the value for “a”?
b.
What is the value for “b”?
c.
What is the tax liability of a family with an income of $50,000?
d.
At what level of income will a family neither pay taxes, nor receive an income subsidy?
12. Explain what is meant by "in-kind transfer" programs. Briefly outline the advantages and disadvantages of an
in-kind transfer program.
74 ❖ Chapter 20/Income Inequality and Poverty
13. Assume you are a critic of welfare reforms that impose a time limit on the number of years a person is eligible
for welfare benefits. What is the foundation of your critique?
14. Outline the possible work disincentives created by anti-poverty programs. Is there a way to solve this problem
without causing other forms of inefficiency to arise? Explain your answer.
