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Chapter 18: Problem 6

(Related to the Chapter Opener on page 600) In a column in the Washington Post, Robert J. Samuelson wrote, "As for what's caused greater inequality, we're also in the dark. The Reagan and Bush tax cuts are weak explanations, because gains have occurred in pretax incomes.... Up to a point, inequality is inevitable and desirable." a. What are pretax incomes? b. Do you agree with Samuelson's argument that income inequality may be inevitable and desirable? Briefly explain.

Short Answer

Expert verified
a. Pretax income is the income that a company or individual makes before taxes and other deductions are taken out. b. Whether income inequality is inevitable or desirable largely depends on one's personal beliefs and understanding.

Step by step solution

01

Understanding Pretax Incomes

Pretax income, also known as earnings before tax (EBT), is the income that a company or individual makes before taxes and other deductions are taken out. It includes all revenue sources and deducts the cost of doing business, but not deductions for taxes. In the case of individuals, it usually relates to gross income before any deductions or taxes.
02

Forming an Opinion about Income Inequality

The perception of income inequality being inevitable and/or desirable is largely subjective and depends on one's personal beliefs and values. Some may argue that it is inevitable due to various factors such as individual capabilities, opportunities, competition, etc. Moreover, it might be considered desirable as it can potentially promote competition and hard work by providing rewards for excellence and innovation. However, others may oppose this view arguing that extreme income inequality can lead to societal problems and unrest.

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Most popular questions from this chapter

Why do economists often use a lower poverty threshold for low-income countries than for high-income countries such as the United States? Is there a difference between relative poverty and absolute poverty? Briefly explain.

An article describing the work of James Buchanan observed, "Buchanan and other public choice theorists altered the debate by proposing that government may not really correct problems in the marketplace because of the wealth trading, or rent seeking, that occurs during the legislative process." The same article included the following statement by Buchanan: "I was greatly influenced by Knut Wicksell's admonition that economists cease acting as if government were a benevolent despot." a. Explain why James Buchanan and other public choice economists believed that government policymakers do not act as "benevolent despots." b. Why would "rent seeking" be an impediment to government attempts to correct "problems in the marketplace"?

(Related to Solved Problem 18.4 on page 621 ) Evaluate the following statement: "Policies to redistribute income are desperately needed in the United States. Without such policies, the roughly 13 percent of the population that is currently poor has no hope of ever climbing above the poverty line."

What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the effect of a change in taxes on economic behavior?

What is a Lorenz curve? What is a Gini coefficient? If a country had a Gini coefficient of 0.48 in 1960 and 0.44 in 2018 , would income inequality in the country have increased or decreased?
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