Price Elasticity, Tax Incidence, Income Distribution, Lorenz, GINI

Begin 2 Principles 4 Distribution Of Income 5 Poverty3 Shifting End1

Price Elasticity, Tax Incidence, Income Distribution, Price Elasticity, Tax Incidence, Income Distribution, Lorenz, GINILorenz, GINI

How will an internet tax effect sales?

Source: WSJ 12/8/03

Right mouse click to advance, or Use the arrow keys to navigate in the presentation : the up or right arrow to advance, the down or left arrow to go back; The image of the house appears on every slide in the upper left and operates as a hyper link to the slide “Lecture Outline”

Tips for Navigation in the presentation:

Ch 5 Appendix, Ch 3:57-8 & Ch 18: 381-401


Discussion: Gas Tax HolidayDiscussion: Gas Tax Holiday Clinton, McCain Supports, Obama Opposes

– Proposal would eliminate the $0.18 for summer 2008 What would be the effects?

– Would oil companies reduce their price by the amount of the tax the competitive model predicts they would, but is it a competitive market?

– Would consumers react by increasing demand to store gas because of the expectations effect of the subsequent price increase?

– Is the increase in quantity demand good for long term oil policy?– What will be the effect of reduced tax revenues on highway repair

spending and jobs? Source of article and a graphic of tax savings for state tax holiday by

state


Internet Tax: Its Time Has Come?Internet Tax: Its Time Has Come? This is becoming thought of as a benefit tax, especially since internet sales

are a way of avoiding the sales tax. Most people know that sales tax often isn't charged on things bought online,

like Amazon's books and records. Technically, Web shoppers are supposed to pay all their local sales taxes. But online retailers, unlike offline stores, currently aren't being forced to collect them.

This de facto moratorium is slowly coming to an end. A growing number of online retailers are voluntarily charging tax, according to where a buyer resides, as are many catalog companies, including Lands' End. Congress is considering a bill that would, in effect, allow states to force Web retailers to charge sales tax.

These are all welcome developments. The rise in e-commerce is slowly depriving already cash-strapped local governments of crucial revenue. What's more, the online sales-tax break is disproportionately enjoyed by the more affluent part of the population, those who have PCs and shop online.

Source: PORTALS: Slick, Deft Amazon Becomes All Thumbs When Handling Taxes, Lee Gomes. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 6, 2003. pg. B.1 k (the article is in the Uconn Electronic Library -- you have to be logged into the Uconn VPM server, or be on-campus)


Lecture OutlineLecture Outline 1.0 First Slide of Presentation

2. Tax Principles: Benefit, Ability to Pay 3. Tax Shifting

4. Taxes and The Distribution of Income

5. Poverty

End of Presentation


2.0 Tax Principles2.0 Tax Principles

2.1 Tax Principles 2.2 Ability to Pay 2.3 Benefit 2.4 Behavioral Incentive


2.1 Tax Principles2.1 Tax Principles

Some think taxes should be based on the principle of ability to pay.

Others think taxes should be based on the principle of benefits received.

Another use is to discourage socially undesirable behaviors: pollution and health risk are 2 examples

Tax incidence indicates who actually bears the burden of the tax.


2.2a Ability to Pay2.2a Ability to Pay Example: Personal Income

Tax Tax owed depends on ability

to pay as measured by income Rising marginal tax rates

makes the burden larger on those with greater ability to pay


2.2b Income Elasticity of State Tax Systems2.2b Income Elasticity of State Tax Systems

A consequence is that tax revenues fall when the economy falls into recession

The summer 2008 found many state governments facing budget shortfalls and having to make deep budget cuts. CT was one of these states.

Source: WSJ article 7/24/08


2.3a Benefit Principle2.3a Benefit Principle Three years after enacting the first toll hikes since 1988, the

Thruway Authority board decided on Friday to tap motorists again to help fund $2.1 billion in repairs to the 641-mile highway system and state canals.

"The Thruway toll increase is unfair to drivers who are being asked to tighten their belts every day in these troubled economic times," said Gov. David Paterson, who noted that he has asked all agencies under his authority for 3.35 percent cuts in spending.

"For the authority to increase tolls now, without a commitment to take every possible step to reduce spending, runs against the state's goal of fiscal restraint in the face of a national economic downturn," Paterson said.

Thruway Board Chairman John L. Buono said the toll increase is necessary because, at more than 50 years old, the highway's repair and maintenance needs are becoming more costly and crucial.

source


2.3b Gas Tax2.3b Gas Tax The gas tax is another example of a

benefit tax. The gas tax is paid by users of

highways and the gas tax revenues go to the highway trust fund dedicated to the building highways and bridges.

A good idea, but it can have unexpected problems.

Funding problems can develop, as for example, when gas prices rise and demand becomes elastic, there is a revenue squeeze for long term highway construction projects. As in the case of Summer 2008.

Before its collapse in 2008, the Interstate 35W bridge in Minneapolis was part of the one quarter of the nation's bridges that are considered either 'functionally obsolete' or 'structurally deficient.'

Source: WSJ 7/28/08


2.4 Discourage Socially 2.4 Discourage Socially Undesirable BehaviorsUndesirable Behaviors

Cigarette and carbon taxes are examples.

Cigarette Tax


3.0 Tax Sifting3.0 Tax Sifting 3.1

Categories of Tax Incidence/Shifting

3.2 Diagrammatic Illustration -- Sales Tax

3.3 Tax Shifting and Elasticity

3.4 Elasticity and Total Tax Revenue

3.5 Flash Module for Tax Shifting

TAXES


3.1.a Tax Incidence3.1.a Tax Incidence

Statutory Impact (legal)– The individual or organization

described in the statute as liable for the tax

Incidence (economic)– the individuals that ultimately

bear the burden of the tax


3.1.b 3.1.b Tax ShiftingTax ShiftingTax Incidence: to determine this we first

have to analzse tax shifting.Tax shifting

– Occurs when the burden of the tax moves from its point of statutory impact to its final point of resting

– It occurs when the taxed party changes their behavior

– That behavior change is represented by a shift in the relevant demand/supply curve


3.1.c The Sales/Excise Tax3.1.c The Sales/Excise Tax

First Example– Excise Tax– Statutory Liability is on the Seller– The seller sends in the tax payment– The seller also raises prices– Represent this by a leftward

(backward) shift of the supply curve


3.2 a Representation of a Sales Tax 3.2 a Representation of a Sales Tax

Since the government now gets $0.20 for each ounce sold, that amount must be added to the original supply curve to get a supply curve that includes the tax •the shift in the supply curve from S to St

reflects the decrease in supply resulting from the tax •the effect of the tax is to shift the supply upward by the amount of the tax.

D

(a) Less elastic demand

Pri

ce p

er o

un

ce

Millions of ounces per day

10

$1.00

S

0

Before the tax is imposed, the intersection of demand and supply yields a market price of $1.00 per ounce and a market quantity of 10 million ounces per day.

St

$1.15

9

$0.20 Tax

Suppose a tax of $0.20 is imposed on each ounce sold. Recall that the supply curve represents the amount that producers are willing and able to supply at each price.


3.2b Tax Shifting: Buyer and Seller Tax Burdens3.2b Tax Shifting: Buyer and Seller Tax Burdens

EXCISE TAX CONSUMPTION TAX

$10 Tax

Tax

10

15

2020

10

15

Buyer Burden

Buyer Burden

Seller Burden Seller Burden

SUMMARY

Old Price 15

Tax 10

New Price 20

Buyer Burden 5

Seller Burden 5


3.2 c Shifting the Sales Tax3.2 c Shifting the Sales Tax

D

(a) Less elastic demand

Pri

ce p

er o

un

ce


10

$1.00

SSt

9

$1.15

0.95

0

The result of the tax is to raise the equilibrium price from $1.00 to $1.15 and to decrease the equilibrium quantity from 10 million to 9 million ounces.

Thus, consumers pay $1.15, or $0.15 more per ounce, and producers receive $0.95 after the tax, or $0.05 less per ounce.Consumers pay $0.15 of the tax as a higher price and producers pay $0.05 as a lower receipt.

The shaded area shows the tax collected, which equals the tax per ounce of $0.20 times the 9 million ounces sold $1.8 million in tax revenue per day.

Graphically, the upper shaded area shows the tax paid by the consumers through a higher price.

$0.20 Tax

The lower portion showing the tax paid by producers through a lower net-of-tax receipt.


3.3a TAX SHIFTING: Role of Elasticites3.3a TAX SHIFTING: Role of Elasticites

The elasticities of Supply and Demand determine the buyer/seller share’s of the tax burden– The more inelastic demand is relative to

supply the greater the buyer burden– The more inelastic supply relative is to

demand the greater the seller burden

Time horizon– in the short run the burden is more likely to

stay at the point of impact– in the longer run, adjustments are more

likely to shift the burden


3.3c Tax Shifting: Demand Elasticity Again 3.3c Tax Shifting: Demand Elasticity Again

The more price elastic the demand, the more the tax is paid by producers as a lower net-of-tax receipt and the less it’s passed on to consumers as a higher price

The less price elastic the demand, the more the tax is paid by consumers as a higher price and the less is paid by producers as a lower net-of-tax receipt


3.4a Tax Shifting: Demand 3.4a Tax Shifting: Demand Elasticity and Total RevenueElasticity and Total Revenue

The total tax revenue is greater the more price inelastic is demand, because the reduction in quantity transacted is smaller than otherwise.

Governments tend to tax products with inelastic demand– Cigarettes– Liquor– Gasoline– Gambling


3.4b Tax Shifting: Supply Elasticities 3.4b Tax Shifting: Supply Elasticities

$1.00

$1.05

D''

(b) Supply Less Elastic than Demand

Pri

ce p

er o

un

ceMillions of

ounces per day10

S´´St''

9

0.85

0

(a) Supply More elastic than Demand

Pri

ce p

er o

un

ce


$1.00S'

St'

8

$1.15

0.95

0

D''

10 9

The same demand curve appears in both panels.

Equilibrium price = $1.00, and equilibrium = 10 million ounces of tea leaves per day.

Sales tax of $0.20 per ounce is imposed, supply decreases in both (a) and (b) to reflect the tax.

In (a) the price rises to $1.15 or $0.15 above the pretax price of $1.00, while in (b) the price increases by only $0.05More tax is passed on to consumers where supply is more elastic (panel a). Less tax is passed on to consumers where supply is less elastic (panel b).

$0.15 $0.05

Panel A Panel B

$0.2

0 T

ax

$0.20 Tax


3.4c Tax Shifting: Supply Elasticity Summary3.4c Tax Shifting: Supply Elasticity Summary

The more elastic the supply, the less the tax is paid by producers as a lower net-of-tax receipt and the more is passed on to consumers as a higher price

The less elastic the supply, the more the tax is paid by producers as a lower net-of-tax receipt and the less is passed on to consumers as a higher price


3.4d Tax Shifting: Polar Cases 3.4d Tax Shifting: Polar Cases

$1.00

$1.05

D''

(b) Supply Less Elastic than Demand

Pri

ce p

er o

un

ceMillions of

ounces per day10

S´´St''

9

0.85

0

$0.20 Tax

(a) Supply More elastic than Demand

Pri

ce p

er o

un

ce


$1.00S'

St'

8

$1.20

0.95

0

$0.20 Tax

D''

10 9

The same supply curve appears in both panels.

Equilibrium price = $1.00, and equilibrium = 10 million ounces of tea leaves per day.

Sales tax of $0.20 per ounce is imposed, supply decreases in both (a) and (b) to reflect the tax.

In (a) the price rises to $1.20 or $0.20 above the pretax price of $1.00, while in (b) the price increases by only $0.05 to $1.05More tax is passed on to consumers where supply is more elastic (panel a). Less tax is passed on to consumers where supply is less elastic (panel b).

$0.20$0.05


3.5 Flash Module: 3.5 Flash Module: Illustrate Tax ShiftingIllustrate Tax Shifting


4.0 Taxes and the Distribution of Income4.0 Taxes and the Distribution of Income 4.1 Taxes effect the Distribution of Income –

– Regressive, 3.3 Proportional, Progressive 28 4.2 How the Income Distribution is measured:

– Population Quintiles, 29 4.3 Lorenz Curve 31-33 4.4 GINI Coefficient 34-33 4.5 Trend in Income Inequality over Time 36 4.6 Taxes: Proportional, Flat 37 4.7 Determinants of Household Income 38-42

– Earnings, Number of Adult Workers 4.8 Problems with the Measure of the Income Distribution 43-45


4.1 Taxes Effect Income Distribution4.1 Taxes Effect Income Distribution

Their effect as measured a % of income and has 3 categories:– Regressive: the burden falls as a percentage of income

as income rises. Example: Payroll Tax– Proportional: the burden is constant as a percentage of

income as income rises. Example: A proposed Proportional income tax

– Progressive: the burden rises as a percentage of income as income rises. Example: The US Personal Income Tax


4.2a Income Distribution4.2a Income Distribution

Economists quantify the distribution of income and see how it has changed over time, focusing on the household as the unit of measure

After dividing the total number of U.S. households into five groups of equal size – quintiles – ranked according to income, we have Exhibit 1 by decade since 1970


4.1 4.3 3.9 3.6

10.8 10.3 9.6 8.9

17.4 16.7 15.9 14.9

24.5 24.0 23.2

16.6 15.8

18.6

21.5

24.9

0

5

10

15

20

25

30

35

40

45

50

55

19701980

19902000

19701980

19902000

19701980

19902000

19701980

19902000

19701980

19902000

Shar

e by

per

cent

46.643.3

43.7

49.9

Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile

Middle 60 percent

Top 5 %

•Households in the lowest, or poorest, fifth of the population received only 4.1% of the income in 1970•Households in the highest, or richest, fifth received 43.3% of the income• U.S. Census Bureau measures income after cash transfer payments are received but before taxes are paid.

•Share of income going to the top fifth has increased •Share going to the bottom fifth has decreased slightly

Primary contributor to the larger share going to the highest group has been the growth of two-earner households in the top growth and the growth in single-parent households in the bottom group.

decrease

increase

4.2b Share of Aggregate Household Income4.2b Share of Aggregate Household Income

The share of income going to the top 5% of households has grown since 1980, accounting for all the growth in the top 20% of households


4.3a Lorenz Curve4.3a Lorenz Curve The Lorenz curve is another

way to picture the distribution of income in an economy

The Lorenz curve shows the percentage of total income received by any given percentage of households when incomes are arrayed from smallest to largest

Exhibit 2 provides the Lorenz Curve


0

20

40

60

80

100

0 20 40 60 80 100

Cumulative percent of households

Cum

ulat

ive

perc

ent o

f inc

ome

Line of e

qual dist

ributio

n

Cumulative percentage of households is shown along the horizontal axis, and cumulative percentage of income is on the vertical axis. If income were equally distributed, each 20% of households would receive 20% of the total income the Lorenz curve would be the straight line shown in blue.

As distribution becomes more uneven, the Lorenz curve is pulled down and to the right, away from the line of equal distribution.

Point a on the 1970 Lorenz curve (in red) indicates in that year the bottom 80% of families received 56.7% of the income and the top 20% received 43.3% of the income. Point b on the 2000 Lorenz curve (in green) shows the bottom 80% received 50.6% of the income and the top 20% received 49.4% of the income.

.ab

Since the Lorenz Curve for 2000 is farther from the line of even distribution than it was for 1970, income has become more unevenly distributed.

.

4.3b Lorenz Curve4.3b Lorenz Curve


0

20

40

60

80

100

0 20 40 60 80 100

Cumulative percent of households

Cum

ulat

ive

perc

ent o

f inc

ome

Line of e

qual dist

ributio

n

The blue diagonal represents if income were equally distributed, each 20% of households would receive 20% of the total income

The blue diagonal represents distribution becomes more uneven, and 100% of the income is received by the top 1% of families. Then the Lorenz curve is pulled down and to the right, away from the line of equal distribution.

.ab

.

4.3c Lorenz Curve Special Cases4.3c Lorenz Curve Special Cases


4.4a Gini Coefficient4.4a Gini Coefficient This index measures the degree of inequality in the distribution of

family income in a country. The index is calculated from the Lorenz curve, in which cumulative

family income is plotted against the number of families arranged from the poorest to the richest. The index is the ratio of (a) the area between a country's Lorenz curve and the 45 degree helping line to (b) the entire triangular area under the 45 degree line.

The more nearly equal a country's income distribution, the closer its Lorenz curve to the 45 degree line and the lower its Gini index, e.g., a Scandinavian country with an index of 25.

The more unequal a country's income distribution, the farther its Lorenz curve from the 45 degree line and the higher its Gini index, e.g., a Sub-Saharan country with an index of 50.

If income were distributed with perfect equality, the Lorenz curve would coincide with the 45 degree line and the index would be zero;

if income were distributed with perfect inequality, the Lorenz curve would coincide with the horizontal axis and the right vertical axis and the index would be 100.

Source


4.4b Gini Coefficient4.4b Gini Coefficient t is also a measure of the inequality of a distribution. If the area

between the line of perfect equality and Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini coefficient is A/(A+B) . Since (A+B)=.5 , the Gini coefficient, G=A/(.5)=2A=1-2B .

Some important properties of the Gini coefficient are: The Gini coefficient is a measure of inequality of a distribution.

It is defined as a ratio with values between 0 and 1: the numerator is the area between the Lorenz curve of the distribution and the uniform (perfect) distribution line; the denominator is the area under the uniform distribution line.

The higher the Gini coefficient, the greater the inequality. A value of zero corresponds to perfect income equality

(everyone has the same income), while a value of 1 corresponds to perfect income inequality (one person has all the income, and the rest of the population has none).

It does not indicate how the inequality is distributed, only the total amount of inequality.

The Gini coefficient can be used to indicate how a distribution changes over time and if this change shows that equality is increasing or decreasing.

For an explanation of the calculation of the GINI Coefficient, and the plotting of the Lorenz Curve in a web tutorial click here Source


4.4c Elite loss and Rebound, Income 4.4c Elite loss and Rebound, Income Inequality Rose Substantially in 2004Inequality Rose Substantially in 2004

Income inequality, using measurements from the latest IRS Statistics of Income on U.S. Tax Units shows an increase in 2004.

Basically, top incomes took a hit in 2001-2002 from capital losses, with spillovers to executive compensation. But top incomes started to pull ahead again in 2003, and there's every indication that when we get data for 2005 and 2006 they'll show a new surge.

The graph above plots the Gini index of IRS data calculated going back to 1990 and extending up until 2004 (most recent data available from the IRS). The Gini index rose by 2.9 percent or about 0.016 points. The Gini index is closing in on the peak of U.S. income inequality

Gini index for U.S. Tax Units, 1990-2004 calculated by Thomas Volscho from IRS Statistics of Income data on Adjusted Gross Income. Dept. of Sociology, University of Connecticut.

Year Gini Year Gini1990 0.5290 1997 0.56001991 0.5250 1998 0.56601992 0.5320 1999 0.57601993 0.5470 2000 0.58401994 0.5320 2001 0.56101995 0.5400 2002 0.55001996 0.5520 2003 0.5550

2004 0.5710

Source


4.5 Proportional and Flat Taxes4.5 Proportional and Flat Taxes Flat Proportional

Tax: leaves Lorenz Curve unchanged

Flat Amount Tax moves Lorenz curve to the right

In the session 04 Learning Module the Excel Exercise has a structured example so you can prove to yourself that a proportional tax does not change the Lorenz Curve (select tab “Example (3)”.

Lorenz Curve

0

0.2

0.4

0.6

0.8

1

0 0.2 0.4 0.6 0.8 1

Cumulative Population Share

Cu

mu

lati

ve I

nco

me

Sh

are

Hypothetical Distribution

Perfect Equality

Proportional Tax

Flat Tax


4.6a Determinants of Household Income4.6a Determinants of Household Income

In a market economy, income depends primarily on earnings, which depend on the productivity of one’s resources

Determinants:– Educational Attainment– Industrial Structure– Family Structure


4.6b Educational Attainment (Labor Supply)4.6b Educational Attainment (Labor Supply)

Incomes also differ for all the reasons labor incomes differ, such as differences in education, ability, job experience, and so on

Differences in earnings based on age and education reflect a normal life-cycle pattern of income

– In fact, most income differences across households reflect the normal workings of resource markets, whereby workers are rewarded according to their productivity

– Contributing to the dominance of the top group is a growing premium paid those with a college education for a number of reasons


4.6c 4.6c Industrial Structure (Labor Demand)Industrial Structure (Labor Demand)

– Trends such as industry deregulation, declining unionization, and freer international trade have reduced the demand for workers with less education

– New computer-based information technologies have reduced the demand for low-skilled clerical workers

– The supply of less-educated workers increased more than the supply of more-educated workers


4.6d 4.6d Family StructureFamily StructureOne reason household

incomes differ is that the number of household members who are working differ– For example, over two-

thirds of households in the bottom 20% are headed by unmarried females


4.6e 4.6e OtherOther

Others may face limited job choices and reduced wages because of – age, – discrimination,– bad luck,


4.7a Big Picture Problems with 4.7a Big Picture Problems with Distribution BenchmarksDistribution Benchmarks

First is that there is no objective standard for evaluating income distributions– The usual assumption is that a more equal distribution is

more desirable, but is a perfectly even distribution most preferred?

– A “normative’ not a “positive” economic issue A problem with allocating income according to

productivity is that some people have difficulty earning income– Some have mental and physical disabilities

A problem with reducing inequality is the potential for an adverse effect on work incentives


4.7b Problems with Distribution Benchmarks: 4.7b Problems with Distribution Benchmarks: Conceptual -- Using Consumption instead if Income Conceptual -- Using Consumption instead if Income

as the baseas the base

Third, a better measure of household welfare might be the distribution of expenditures– Evidence on expenditures

indicates that spending by quintiles is much more evenly distributed than income

– Reflects the life cycle pattern that expenditures needs are fairly constant over a life cycle, but earnings are typically highest in middle age

Income

Spending


4.7c Problems with Distribution 4.7c Problems with Distribution Benchmarks: Minor CaveatsBenchmarks: Minor Caveats

A second problem is that most distributions measure money income after cash transfers but before taxes,– it omits the effects of taxes,

overstates the share of income going to upper income groups

– It omits in-kind transfers such as food stamps and free medical care

understates the share of income going to lower income groups


5.0 Poverty5.0 Poverty 5.1 The Level of Poverty 47

5.2 How it is measured: Orshansky Food Budget 48 5. 3 Trend over Time 49-51 5.4 Problems with the Measure 52 5.5 Programs to reduce Poverty 53-59

– TANF, Earned Income Credit

Food Kitchen


5.1 The Level of Poverty5.1 The Level of Poverty Since poverty is such a relative concept, how do we measure it

objectively and how do we ensure that our measure can be applied with equal relevance over time?

The benchmark for poverty analysis is based on the assumption that the poor spend about one-third of their income on food (based on a consumption budget from 1954 ) the U.S. Department of Agriculture estimates the cost of a nutritionally adequate diet


5.2 How Poverty is Measured5.2 How Poverty is Measured

This nutritionally adequate diet is then multiplied by three to generate the U.S. official poverty level

The poverty definition is based on pretax money income, including cash transfers, but it excludes the value of noncash transfers such as food stamps, Medicaid, subsidized housing, or employer provided health insurance

Exhibit 3 presents some basic poverty measures


5.3a Exhibit 3: Trends in Poverty5.3a Exhibit 3: Trends in Poverty


Exhibit 4: In 1959, the elderly were the poorest group, with a poverty rate of 35%. Since then, poverty among the elderly has declined to a record low of 9.7% in 2000.

This decline stems from tremendous growth in spending for Social Security and Medicare. – In real terms those two programs grew tenfold from $62 billion in

1959 to over $620 billion in 2000, measured in 2000 dollars. – Thus, while not welfare programs in a strict sense, Social Security

and Medicare have been extremely successful in reducing poverty among the elderly.

5.3b Poverty has Fallen Among Poor Elderly5.3b Poverty has Fallen Among Poor Elderly


5.3c Exhibit 4: Poverty Rates by Age: 1959–20005.3c Exhibit 4: Poverty Rates by Age: 1959–2000


5.4 Problems with Poverty Measure5.4 Problems with Poverty Measure

Threshold budget is outdated– based on a consumption budget from 1954– New measure should be based a percentage of median

family expenditures for basic food, clothing, shelter, and a specified multiplier for other needs.

Definition of family resources should be broader:– Add value of in-kind benefits– Deduct taxes, out-of-pocket medical expenses, child

care cost (for families with no-non-working parents), a flat amount of work-related transportation expenses

Consequence of the above changes would mean a substantial increase in the reported number of families in poverty.


5.5a Programs to Help the Poor5.5a Programs to Help the Poor

What should society’s response to poverty be?

Families with a full-time worker are nine times more likely to escape poverty than are families with no workers a healthy economy remains the first line of defense in fighting poverty

However, even when the unemployment rate is low, some people remain poor


5.5b Programs to Help the Poor5.5b Programs to Help the Poor Since the mid-1960s, social welfare expenditures

at all levels of government have increased significantly

The major income assistance programs are:– TANF (Temporary Assistance to Needy Families)– Earned Income Tax Credit


5.5c Income Assistance: TANF5.5c Income Assistance: TANF

Temporary Assistance for Needy Families (TANF) which provides cash to poor families with dependent children, replaced Aid for Families with Dependent Children (AFDC)

Controlled by each state and carries no federal entitlement

Each state given a fixed grant program to help fund TANF programs


5.5d TANF replaced Welfare (AFDC) 5.5d TANF replaced Welfare (AFDC)

There was much dissatisfaction with the old welfare system, both among those who pay for the programs and among direct beneficiaries

Analysts came to believe that one way to reduce poverty was to provide welfare recipients with job skills and make them find jobs workfare programs– Where tried these state programs indicate that they

do save some money because those in the welfare-to-work left welfare rolls sooner


5.5e Welfare Reform5.5e Welfare Reform Temporary Assistance for Needy Families

(TANF) replaced Aid to Families with Dependent Children (AFDC) – AFDC set eligibility rules and left federal costs

open-ended through matching grants to the stats– TANF offers a block grant to the states to run their

welfare programs – Each state must pay 100 percent of any welfare costs above the

federal grant

– states have wide latitude to run their own welfare programs


5.5f Welfare Reform5.5f Welfare Reform Concerns about welfare

dependency fostered some special provisions

– TANF imposes a lifetime limit of five years that a recipient can be on welfare

– All able-bodied recipients on welfare for two years must participate in welfare-to-work programs

Otherwise, states are free to set benefit levels and experiment however they choose

– A concern with ending federal entitlements and capping grants to states is what will happen should the economy enter a recession


5.5g Taxes: The Earned Income Tax Credit5.5g Taxes: The Earned Income Tax Credit

The federal government also provides an earned-income tax credit which supplements wages of the working poor

In addition to cash transfer programs, a variety of in-kind transfer programs provide health care, food stamps, and housing assistance to the poor


END OF PRESENTATIONEND OF PRESENTATIONClic a pic to review topic

Documents

Price Elasticity, Tax Incidence, Income Distribution, Lorenz, GINI