Chapter Review: Key Points. 1 Lorenz curvesare one way to portray inequality

1 Lorenz curves are one way to portray inequality. Lorenz curves for income are graphical representations of the cumulative percentages of income received by given cumulative percentages of families. If the Lorenz curve is a straight-line diagonal, the income distribution is perfectly equal. Deviations from this diagonal reflect inequality in distribution.

2 A related statistical measure of income inequality is the Gini index or coefficient. The Gini index is defined as the ratio of the area between the line of perfect equality and the Lorenz curve to the total area under the line of perfect equality. The Gini index varies from a value of 0 (perfect equality) to 1 (perfect inequality).

3 Relative income measures the extent to which income is above or below median income. Today a greater percentage of Americans are making more than twice median income and more are making less than half of median income. The result is a shrinking middle class.

4 Since 1970 income distribution in the United States has become more unequal as shown by pretax and transfer Gini coefficients. Developed nations, in general, tend to have more equal distributions of income that developing nations.

5 The Social Security Administration has developed income indices that define poverty lines for various family sizes, ages, and locations.

6 The causes of povertyare many and varied. Relative to middle or upper-class families, the poor tend to have less education, fewer earners, and more children. These characteristics of the poor are not necessarily the causes of poverty. Discriminationmay be an important factor. Persistent discrimination reduces incentives to invest in education and other marketable skills. Discrimination is often cited as the primary reason that a relatively large proportion of black families are in the lower income categories.

7 The major government program to fight poverty is Aid to Families with Dependent Children (AFDC). A floor on family income is established, but as the family earns additional income, reductions of AFDC benefits often pose extreme disincentivesfor work. Given the large number of different programs designed to help the poor, $1 increases in earned income sometimes result in more than $1 of lost benefits.

8 Negative income tax plans (NITs) have been suggested as solutions to the "welfare mess." Negative income tax proposals provide a floor on income; as additional income is earned, benefits are reduced but by less than the additional income earned. In general, NIT plans consolidate numerous programs under one administrative roof and might allow either reduced costs or increased benefits. NIT plans have not been widely adopted, but NIT incentives have been adapted to many programs and provide the basic rationale for earned income tax credits aimed at keeping low-income working Americans above the poverty line. (2704 digits)

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