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Measurement of Income Inequality and Redistribution

Measurement of Income Inequality and Redistribution. Ivica Urban Institut za javne financije Croatian Quants Day, Zagreb, 9 April 2010. The distribution of income. “Capitalism has solved the problem of production, but failed to solve the problem of distribution.”

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Measurement of Income Inequality and Redistribution

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  1. Measurement of Income Inequality and Redistribution Ivica Urban Institut za javne financije Croatian Quants Day, Zagreb, 9 April 2010

  2. The distribution of income • “Capitalism has solved the problem of production, but failed to solve the problem of distribution.” • Economics: not an easy science – many diverging views on how to organize society • Egalitarians, interventionsts, socialists, libertarians...

  3. Libertarians • “There is no problem of ‘distribution’ at all.” • “On the free market, everybody earns income in accordance with services provided to consumers.” • Example: Ice-cream producer

  4. Egalitarians • “There is too much of inequality around, as a result of market process.” • “It is an unfair situation and the government must be called to redistribute income.” • Redistribution: taking from ones and giving to others • If the “ones” are higher-income, and the “others” are lower-income people → reduction of income inequality

  5. Socialism • Abolishment of private property • Central planning of production and income distribution • No economic and political freedoms • But still, we can hear: “It was a just society, everybody had a job, noone was left behind...”

  6. Today, we’re all egalitarians! • Modern democracies: huge “social security” systems • A massive income redistribution apparatus: taxes, benefits and regulation • How to estimate the impact of government?

  7. Lorenz curves

  8. Gini coefficient = double the area between the Lorenz curve and the line of absolute equality

  9. Income redistribution • X = income before fiscal action • Tp = amount of pth tax • Bq = amount of qth benefit • N = income after taxes and benefits • N = X - Σ Tp+ Σ Bq

  10. Income redistribution

  11. Income redistribution

  12. Horizontal equality / inequality

  13. Horizontal equality / inequality • the principle of horizontal equality: “equals” should have equal treatment • people with equal incomes should obtain equal net fiscal benefits

  14. Horizontal equality / inequality

  15. Horizontal equality / inequality

  16. NKDE-2D • Normal Kernel Density Estimation in 2 dimensions: hn = optimal bandwidth S = sample covariance wi = sample weights N = n x wi, n = number of observations

  17. Conditional density • Normal KDE in 2 dimensions, to obtain estimates of f(x,y), from which f(y|x) are calculated using:

  18. Measurement model • Utility of income function U(y) with inequality aversion parameterε: • Equally distributed equivalent income (incomethat, if obtained by every individual, would deliver the same welfare as actual income):

  19. Measurement model

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