The document discusses graphing a Lorenz curve on pages 416-417 and comparing it to something on page 418. It also mentions a short quiz asking about wealth distribution between countries and why it may or may not matter. Finally, it provides instructions for a small group exercise to draw the Lorenz curve for a fictional country called Travistan and think of ways to reduce inequality in the country.

1. In your notes: Page 416-417
• Graph our orenz curve
• A problem?
• Compare to page 418

5. Short Quiz
1. Which country has a more equal distribution of
wealth?
2. Why might that matter?
3. Why might that not matter?

6. A small group exercise
• The small country of Travistan has 10 citizens. The citizens and their earned
incomes are listed below:
• Citizen
Earned Income
• Zak
$ 2,000
• Erika
$10,000
• Bill
$ 1,500
• Juan
$ 15,000
• Harry
$ 16, 000
• Jose
$ 9,000
• Emily
$ 30,000
• Kai
$ 12,000
• Robert
$ 8,000
• Kathleen $ 20,000
1. Draw the Lorenz Curve for this country.

7. A small group exercise
• The small country of Travistan has 10 citizens. The citizens and their earned
incomes are listed below:
• Citizen
Earned Income
• Zak
$ 2,000
• Erika
$10,000
• Bill
$ 1,500
• Juan
$ 15,000
• Harry
$ 16,000
• Jose
$ 9,000
• Emily
$ 30,000
• Kai
$ 12,000
• Robert
$ 8,000
• Kathleen $ 20,000
• Think of 5 ways we could reduce the inequality of this country
• (improve economic mobility)

8. Taxation
“In this world nothing can be said to be certain, except
death and taxes.”
Benjamin Franklin

9. In reality…
•
US Federal Tax Rates: (only 3 % of Americans make over $250,000)
•
Add 10 -15 % more depending on which state you work in

10. World Tax Rates
Country
Corporate
Tax rate
Income
Tax
Sales
Tax
United
Kingdom
21-28%
0-40
%
17.5%
Ireland
12.5 %
2041%
21 %
Mexico
29%
3-29
%
15 %
Sweden
28 %
0-59
%
25 %
Slovakia
19 %
19 %
19 %
Hong Kong
15 %
0-15
%
0%
United Arab
Emirates
0%
0%
0%

11. Net Income
• Gross income: How much you earn
• Net income: how much you keep
•
•
•
•
Net income = gross income - gross income*tax rate
For example: Mr. Klein made $37,500 last year.
Net income = $37,500 - $37,500(.25)
Net income = $37,500 - $9,375 = $28,125

12. What are “Good Taxes”?
•
•
•
•
According to Adam Smith:
Simple to understand
Avoid negative incentives
Avoid loopholes
• IRS manual – 70,000 pages
– (4 X size of the Bible)
• Economist reading from 2010

13. Income Tax in USA
•
•
•
•
IRS – tax collection agency in USA
Taxes are deducted throughout year
Every citizen must file every year by:
If you paid more during the year then you
need to: you get a refund
• If you paid less during the year then you need
to: pay the difference

14. Taxes: For Example
• For example: Mr. Klein made $37,500
last year.
• Net income = $37,500 - $37,500(.25)
• Net income = $37,500 - $9,375 =
$28,125
• If Mr. Klein paid $10,375 in 2010, what
happens after he files?
• Why is a BIG refund not such a great
idea?

15. Progressive Income Tax
Tax on a household income
% of changes based on income
Ability to pay principle
“tax the rich more!”
The more you make, the higher your
tax %
For example: Tax $12/hour labor or
accountant $55,000/year
Why common in USA & EU
Incentive?
What should happen to the Lorenz
curve?
Income
$0-$15,000
$15,001$20,000
$20,000$30,000
$30,000$50,000
$50,000$100,000
$100,001 +
Tax
Rate
0%
10%
15%
25%
33%
38%

18. Proportional Income Tax
• Tax on a household
income
• % of stays the same
• “flat tax”
• For example: 5% tax,
$25,000/year or
$100,000/year
• Why rare in USA?
• Incentive?

19. But wait, the government isn’t done yet!
• Other taxes

20. Property tax
• Tax on something you own
• Usually expensive like your
house or boat
• For example: $100,000
home
– 5% property tax rate
• 100,000 X .05 = $5,000
property tax
• Incentive?
8.01 % ave Pima Co rate

21. Regressive Tax
• Smaller % taken the higher your
income
• Sales tax
• For example: 5% tax, $25,000/year
w/$10,000 consumption pays: 10,000
X .05 = $500, or 2% of total income
• $50,000/year w/$15,000 consumption
pays: 15,000 X .05 = $750, or 1.5% of
total income
• Incentive?
• Why don’t poor burn down Phoenix
capital building?

23. Regressive taxes

24. Regressive taxes

25. Regressive taxes

26. Capital Gains Tax
• Tax on real estate, stock sales or
dividends, or collectables.
• Why not only for the rich?

27. Gift tax
• Tax on gifts or rewards
• Games
shows, gambling, lottery
• Rate depends on gift
• 35-60 %
• Is this a bad incentive?

28. Tucson painter Ted DeGrazia

29. Estate tax
• Tax on inheritance
• Sometimes called
“death tax”
• In US
today, $2,000,000 and
up
• 55% rate
• Is this a bad
incentive?

30. If you are curious…
• US estate taxes over the years
• GW Bush worked to repeal in
2001
• Came back in 2011 when law
expires
• Barack Obama supports estate
tax

32. Tax Freedom Day!
Day when the average person has
earned enough to pay taxes