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Income redistribution. Today: Conceptual issues Programs for the poor. Previously. Income redistribution through Social Security Redistribution from young to old Redistribution from rich to poor Redistribution from those that die young to those that die old. Today. - PowerPoint PPT Presentation
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Income redistribution
Today: Conceptual issues Programs for the poor
Previously
Income redistribution through Social Security Redistribution from young to old Redistribution from rich to poor Redistribution from those that die young to those
that die old
Today
More on income redistribution Chapter 12
Conceptual issues Distribution of income Rationales for redistribution In-kind versus cash transfers
Chapter 13 Various welfare programs for the poor
TANF, EITC, Supplemental Security Income, Medicaid, Unemployment insurance, Nutrition programs, Housing assistance, Education/Job training
Conceptual issues
How is income distributed? Is there such a thing as “too much” income
inequality? Why should there be redistribution?
Simple utilitarianism Maximin criterion
In-kind versus cash transfers When income is redistributed, should recipients be
forced to consume a minimum amount of certain goods?
Is there “too much” income inequality Some people would argue yes
“Marginal utility of income is lower for somebody with high incomes”
“Each person has a right to a minimum standard of living”
“Social unrest may occur unless each person is above the poverty line”
Is there “too much” income inequality Some people would argue no
“When economic incentives to make a good living go away, the economic pie becomes smaller” Think about communist systems
“People that have a good work ethic and work hard should make more money”
“There are plenty of opportunities for anybody born today in the US to become successful” Free K-12 education; subsidized colleges and
universities
Absolute income
Real income growth, 1980-2000 Bottom 20% has been flat Top 20% has seen huge growth (59%)
Note that the “economic pie” is getting bigger See also Table 12.1, p. 259, for more on this topic
Quintile 1980 1990 2000
Bottom 20 percent $12,756 $12,625 $14,232
Second 20 percent $27,769 $29,448 $32,268
Middle 20 percent $41,950 $45,352 $50,925
Fourth 20 percent $58,200 $65,222 $74,918
Top 20 percent $97,991 $121,212 $155,527
Top 5 percent $139,302 $190,187 $272,349
Source: “Principles of Microeconomics” 3rd edition, by Frank and Bernanke
Problems with annual income figures Ignores number of workers in a household
General trend from one earner to two Expenses, such as child care, could be higher with in two-
worker households In-kind transfers ignored Taxes change over time
Disposable income changes over time (given the same income)
Income changes over time If a rich person earns no income in a calendar year, should
she be considered “poor?”
Different views of income redistribution Some people believe that utility, not income,
should be maximized within a population Additive social welfare function
W = U1 + U2 + … + Un
See Figure 12.2, p. 264, for a model of optimal income distribution
Different views of income redistribution Others believe that social welfare should be
the minimum of the utilities of each person in society “Veil of ignorance” argument developed by John
Rawls Conceals knowledge and talents from people Risk averse people will want to have income equality
under these conditions No inferiority, jealousy or envy based on income
Different views of income redistribution Commodity egalitarianism
Some things should be made available to everyone without restrictions Right to vote (if 18 or older) Basic education “Needed” items such as food, shelter, and clothing Basic medical care
Recall issues presented in Chapters 9 and 10
Some other factors
Income redistribution does not directly take into account other factors Number of hours worked
If our goal is to maximize utility from income, why not reduce leisure? Not necessarily, since additional leisure likely increases
utility Income depends on number of hours worked
Does relative income matter? Does someone get a decrease in utility when his income
remains the same and someone else’s increase?
In-kind versus money transfers With some views, such as commodity
egalitarianism, in-kind transfers have more appeal than monetary ones
How does this affect individual utility? See Figures 12.3, p. 272, and 12.4, p. 273
Summary: Conceptual issues
People have conflicting opinions as to whether or not there is too much income inequality
Most increases in income in recent decades have gone to the wealthiest of Americans
Some arguments support the use of in-kind transfers rather than monetary transfers
Welfare programs for the poor Over $500 billion in expenditures in 2002
TANF EITC Supplemental Security Income Medicaid Unemployment insurance Nutrition programs Housing assistance Education/Job training
TANF
Temporary Assistance for Needy Families Federal government provides block grants to
states for welfare spending Over 80% of recipients in every state must be on
TANF for five years or less States face penalties if a substantial percentage
of recipients are not working or in work preparation programs
TANF
TANF replaced Aid to Families with Dependent Children (AFDC) Under AFDC, some argued that many women on
AFDC had children out of wedlock to continue get benefits and not have to work If the mother had to work once the child reached
kindergarten, then there would be an economic incentive to have another child
TANF and benefit reduction rates TANF benefits are reduced when income
reaches a certain level Example: In California, recipients can earn up to
$225 per month before benefits are reduced at a rate of 50% of money earned
How do people respond to these incentives in the short run?
Work incentives
B = G – tE
B = 0 if E = G/t
The Basic Trade-offs
G – basic grant if not working
t – rate at which grant reduced when recipient earns money
B – benefit received
Analysis of work incentives
Figure 13.1, p. 281 Budget constraint for leisure and income
Figure 13.2, p. 282 Utility maximization based on the labor-leisure
options
Analysis of work incentives
Figure 13.4, p. 284 In this example, someone can get $100 in TANF
benefits if not working Between point Q and point S, an implicit tax rate
of 25% is imposed Note that there are some incentives to work while
still receiving benefits Figure 13.6, p. 286
In this case, a 100% implicit tax rate is imposed after a benefit of $338 is received
Analysis of work incentives
Hours of leisure per month
Inco
me
per
mon
th (
= e
arni
ngs
+ t
rans
fers
)
0 T
D
P
M
G
R
E2
Hours worked (if working)
This person is indifferent between working and receiving benefits.
See also Figure 13.7, p. 286, for a case in which an individual chooses to work.
EITC
The earned income tax credit A success story for the working poor Provides credits to workers within low incomes
How it worked in 2006 for a family with 2 or more kids 40% credit for first $11,340 earned No additional credit for next $5,470 earned Phased out at a 21.06% rate after $16,810 is
earned, until the credit is gone at $38,348 earned See Figure 13.8, p. 289, for two graphs about this
What has the EITC done?
Households with nobody working Encourages one person to work
Households with one person working Additional work not encouraged once a family with
2+ kids earns $11,340 Does not encourage additional hours of work of the
person already working Does not encourage a second worker in the household
to work
Supplemental Security Income (SSI) Federal program that provides benefits for
the aged, blind, and disabled with little or no assets
In 2003, average benefit was $342 SSI recipients can earn up to $65 per month
without loss in benefits After $65 is earned, additional earnings have a
50% implicit tax rate
Medicaid
Medicaid affects incentives to work Under old incentive structures, people
often lost eligibility once they earned enough money to get off of welfare
This created a “Medicaid notch” See Figure 13.9, p. 292
For main details about Medicaid, see Chapter 10
Solving the Medicaid notch problem In recent years, families that earn enough to
leave welfare can often stay on Medicaid 12 month coverage after leaving TANF Low-income children and pregnant women
Unemployment insurance (UI) States provides insurance for unemployment due to
adverse selection and moral hazard reasons Benefits
Average weekly benefit in 2005: $266 Maximum length of benefits in most states: 26 weeks
Typically financed by a payroll tax on employers Empirical studies find that increasing benefits
increases the duration of unemployment
Food stamps
Many poor households are eligible for food stamps Can only be used for purchasing domestically-
produced food, excluding alcohol and animal food 2004 averages
Monthly benefit was about $200 23.9 million people on food stamps in a given
month
Housing assistance
Public housing projects Largest program, currently about 1.3 million units When kids see building with everyone with low
incomes, there are no role models for being successful
Crime is a big problem Section 8
Recipients rent a unit in the private market Government provides subsidy if unit meets certain
requirements
Education and job training
Programs aimed at poor families Head Start
Results mixed, but mostly positive Training programs
Evidence shows that costs are higher than benefits Job search programs
Not effective in increasing living standards of many people
Overview
See Figure 13.10, p. 299 Estimates marginal tax rates for a one-parent,
two-child household residing in Wisconsin Negative until about $10,000 per year Over 40% from about $12,000-$31,000 per year
Future of social insurance?
Academics are starting to study alternate ideas to help the poor Providing benefits to those most in need, rather
than those that are already “in the system” “One-stop shopping” for help Faith-based support
Government provides cash to the faith-based organization, and the organization provides the service
Summary: Welfare programs for the poor Many programs exist to support poor people Some programs give little economic incentive
to work Exception: Earned income tax credit
End of Unit 3
Next lecture, begin Unit 4 Tax-related topics Read Chapters 14 and 15