The Distribution of Income: Longer-Term Solutions To Poverty

Longer-Term Solutions To Poverty Poverty remains a serious problem in the United States, with close to 15 percent of the population, many of them children, classified as poor when only money income is counted. Including in-kind benefits suggests that only 10 percent of the population can be classified as poor. A significant increase in taxes to finance more generous payments to the poor can eliminate poverty. However, this course of action can also subject the most productive members of society to very sharp increases in taxes. The Negative Income Tax One proposal to deal with povery is to place a floor on incomes through a negative income tax that would provide government payments to people whose income fell below certain levels. These payments would be financed by other people whose income was above the cutoff level of government payments. This program would provide a minimum-income guarantee to all citizens. If a person had zero earned income, the government would give that person a payment equal to the income guarantee. The government payments to each person would decline as earnings increased. For example, suppose the income guarantee were set at the poverty income threshold. If the threshold were $12,000 for a family of four, each such family would be guaranteed an income of that amount even if they had zero earnings. The family's government payments would be reduced by, say, 50 cents for each dollar earned. The reduction in payments as earnings increase is the phaseout rate for transfers to lowincome groups. For example, if this family earned $10,000, its government payment would be reduced by $5,000. The family's total income would be $10,000 earnings plus a $7,000 payment from the government for a total of $17,000 per year. The family wouldn't become subject to taxes until it earned $24,000. At that level of earnings the government payment would finally be reduced to zero. The table in Box 10 shows how a negative income tax plan would work. The problem with the negative income tax is that it would be very expensive. For example, if a $12,000 income guarantee were used along with a phaseout rate of SO cents on the dollar, all families of four with earnings of less than $24,000 per year would be eligible for welfare payments. About 40 percent of the population could be eligible! Needless to say, the tax rates on the remaining 60 percent of the population would have to skyrocket to generate revenue to pay the negative income taxes and finance other goods and services. Although it's an appealing idea, the negative income tax is likely to run into the equityefficiency trade-off problem, which probably explains why it hasn't been adopted in the United States. Eliminating the Causes of Poverty After examining ways to help our country's poor, it's interesting to reflect on the reasons for low incomes. Remember that labor income accounts for more than three quarters of all income earned. Poverty can be viewed as the result of the lack of marketable skills or the inability to work. In the long run, to eliminate the causes of poverty, government must pursue policies that provide educational opportunities or decrease discrimination against minority groups in labor markets. Ultimately, a successful antipoverty program makes the poor self-sufficient by increasing their ability to earn income. Programs that support equality of opportunity, economic growth, education, and effective training of workers to increase their productivity represent long-term solutions to poverty. As we discovered earlier, the burden of poverty is disproportionately borne by blacks, Hispanics, and families headed by women. Is discrimination against these groups a possible cause of their poverty? Discrimination in labor markets occurs when minority-group workers with skills, experience, and training comparable to those of workers in other groups are paid lower wages and have less opportunity for employment and advancement. Do employers in the United States discriminate against minority-group members despite the fact that the Civil Rights Act of 1964 outlawed discrimination in hiring on the basis of race, religion, sex, or national origin? Women on average earn less than men in the United States. Blacks and Hispanics earn less than whites. But is the earnings gap for these groups the result of discrimination or the result of differences in experience, education, and other factors that influence productivity? One study found that over 24 percent of the difference in labor earnings between men and women in the United States can be attributed to factors other than discrimina-tion. It also concluded that about 40 percent of the difference in earnings between blacks and whites is explained by factors other than discrimination. For example, blacks on average are younger than whites, and are generally less experienced. To actually prove the practice of discrimination it must be shown that two workers who are equally productive receive different wages for the same work. The presence of discrimination may be indicated by the fact that not all the differences in earnings between minority-group members and others can be explained by differences in the characteristics of their work. Discrimination can also take the form of restricting minority-group members from entering higher-paying occupations or from acquiring the skills necessary to ear higher wages. For example, women are concentrated in certain occupations such as clerical work and retailing in which wages are lower than average. Exclusion of minority-group members from occupations for which they are qualified is wasteful. It keeps wages higher for certain groups who are shielded from competition by qualified minority-group members. Because the supply of workers in these occupations is smaller than it would be otherwise, wages are higher. By the same token, crowding minority-group members in certain occupations makes wages lower by increasing the supply of labor for these occupations. If discrimination is practiced, therefore, there are both gainers and losers. Elimination of occupational discrimination results in an increase in the value of production. Minority workers can be transferred from jobs in which their marginal revenue product is low to those in which their marginal revenue product is higher. At the same time, the increase in the supply of workers in the higher-paying occupations reduces wages in those jobs while the decrease in the supply of labor for the low-paying occupations increases wages there. Low-income workers remaining in the low-paying jobs therefore benefit. Workers previously suffering from discrimination also enjoy higher wages. The workers who lose are those in the protected occupations in which discrimination was practiced.