Chapter 7. Government Subsidies and Income Support for the Poor

Transcription

1 Chapter 7 Government Subsidies and Income Support for the Poor Copyright 2002 Thomson Learning, Inc. Thomson Learning is a trademark used herein under license. ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval systems without the written permission of the publisher. Printed in the United States of America ISBN X

2 Poverty in million 13% of the population classified as poor

3 Poverty in the United States Poverty threshold or poverty line in 1999 Family Structure Threshold Single $8,667 One Adult-Two Children $13,410 Two Adults-Two Children $16,600

4 Poverty line The Poverty Line was originally created by the Social Security Administration as three times the cost of a nutritionally adequate diet It is updated annually for inflation using the CPI

5 Poverty Rate Numbers in millions, rates in percent 45 Recession Number in poverty Poverty rate Note: The data points represent the midpoints of the respective years. The latest recession began in July 1990 and ended in March Source: U.S. Census Bureau, Current Population Survey, March million 11.8 percent

6 Changing the Poverty Line A new definition proposed during the Clinton Administration would have included child care and other expenses and would raise the threshold to almost $20,000.

7 Why We Have Government Programs to Aid the Poor We are concerned about Equity- Efficiency Trade-Offs. It creates the Positive Externality of Social Stability.

8 Entitlement Programs Government programs that guarantee recipients benefits as long as they meet eligibility tests. Means Tests are typically income and wealth criteria that must be met to be eligible for a program. Status Tests are typically disability, children, and age criteria that must be met to be eligible for a program.

9 Cash Programs TANF: Temporary Aid to Needy Families The program most identified with a welfare check. Also may provide for child-care expenses or job retraining. SSI: Supplemental Security Income The program that provides a cash payment to the widowed, orphaned and disabled. EITC: Earned Income Tax Credit A program that increases the take-home pay of the working poor. As much as $3888 in 2000 for a family with two children.

10 In-Kind Programs Food Stamps are vouchers that enable a broad class of the poor to purchase a wide variety of food products. WIC vouchers enable poor pregnant and post-natal women to purchase a narrow variety of food products. Medicaid is a federal and state funded program that provides health care services to the poor. The Children s Health Insurance Program is a federal program that subsidizes health insurance coverage for the working poor.

11 Major Federal Government Expenditures To Aid the Poor, 2000 Program Federal Spending Dollars (Billions) Percentage of Federal Spending SSI $ TANF $ EITC $ Subtotal of Cash Programs $ Medicaid $ Food Stamps $ Child Protection and Social $ Services Child Nutrition $ Subtotal of In-Kind Programs $

12 Price Distorting Subsidies Price Distorting Subsidies lower the price of the particular good relative to others for eligible people.

13 Expenditure on Other Goods per Month (Dollars) Figure 7.1 A Price Distorting Subsidy L I N 3 N 1 N 2 Subsidy E 1 E 3 U 1 E 2 U 3 U 2 S 0 H 1 H 2 H 3 A L' Housing Services per Month B

14 Dead Weight Loss or Excess Burden Dead Weight Loss (sometimes called Excess Burden ) is the measure of the dollar value of the distortion that exceeds the amount transferred to the recipient.

15 Rent (Dollars per Month) Figure 7.2 Excess Burden of a Subsidy Excess Burden of Subsidy B E A 400 S = MSC 200 C F E S D = MSB 0 Q 1 Q 2 Number of Apartments Rented

16 Price (Dollars per Month) Figure 7.3 Full Subsidization of Medical Services B 25 = P* E 1 A Excess Burden MB L E 2 0 Q* Medical Office Visits per Year Q G

17 Additional Effects of Subsidies: The Case of Increasing Costs Medicaid not only costs taxpayers money to pay for the program, it also increases the amount they pay for medical services by increasing demand for those services.

18 Price (Dollars) Figure 7.4 The Impact of The Medicaid Program on Price: The Case of Increasing Cost S = MSC 35 E 2 25 E 1 D L D M = MSB D O D' M 0 Q L Q' Q I O Q L Q G Q 2 Medical Office Visits per Year

19 Subsidizing Housing Providing an Apartment: This subsidy allocates a standard apartment to an eligible recipient. With this type of subsidy the recipient cannot supplement the subsidy with their cash. It is a take it or leave it option. Housing Vouchers: This subsidy allows the recipient a particular allotment of vouchers to rent housing but the recipient may supplement the subsidy with their cash. Cash: This subsidy is not restricted to spending on housing.

20 Expenditure on Other Goods per Month (Dollars) Figure 7.5 Eligibility for Public Housing and the Effect on Housing Consumption I' 800 = I G M 210 H J 400= F E 2 E 1 U 1 U 2 U 3 A B Housing per Month (Number of Rooms Rented)

21 Expenditure on Other Goods per Month (Dollars) Figure 7.6 Refusing a Public-Housing Subsidy I M G J E 1 U 2 U A Housing per Month (Number of Rooms Rented)

22 Subsidizing Food Food Stamps are the subsidy that allows the recipient a particular allotment of vouchers to buy food but the recipient may supplement the subsidy with their cash. It is illegal to sell the food stamps though it may be in the recipients interests for them to do so.

23 Expenditure on Other Goods per Month (Dollars) Figure 7.7 The Impact of an In-Kind Transfer: Food Stamps A B B B I M 2 M 1 F C E 1 E 2 U 2 L I M 1 E 1 E 1 C U 1 U 3 U 2 U 1 Q F 0 Q F Q F1 Q F2 A A' 0 Q F2 Q F1 A A' Q* 1 Food per Month

24 The Impact of Government Assistance Programs on Work Transfers could cause people to work more or less depending on whether leisure is a normal good.

25 International Food Subsidies Several nations use a price-reducing subsidy to make food more affordable. Programs that reduce the price of food benefit higher-income people as well. Some nations only subsidize food that is typically consumed by the poor. Some nations distribute food directly.

26 Income per Day Figure 7.8 The Income Effect of a Transfer F U 3 C A U 1 U 2 E 3 G E 1 E 2 D Transfer Payment 0 L 1 24 L 2 Leisure Hours per Day

27 Income per Day Figure 7.9 A Transfer that Declines with Earned Income A e.g. T=$300-.7I E C E 1 E 2 B L* 24 L 1 U 1 L 2 U 2 Leisure Hours per Day D Maximum Daily Transfer

28 Empirical Evidence A 10% increase in welfare payments to individuals decreases work effort by 2%.

29 A Negative Income Tax A Negative Income Tax is a system where there is no status test but there is an income guarantee and a take-back rate. T = I G t N I E Where I G = Income guarantee t N = take back rate I E = earned income T = Transfer

30 Break-Even Income 0 = I G t N I B I B = I G /t N

31 Negative Income Tax Earned Income I E Transfer T = I G t N I E Disposable Income I D 0 5,000 5,000 1,000 5,000 ( ) = 4,500 5,500 2,000 5,000 ( ) = 4,000 6,000 3,000 5,000 ( ) = 3,500 6,500 4,000 5,000 ( ) = 3,000 7,000 5,000 5,000 ( ) = 2,500 7,500 6,000 5,000 ( ) = 2,000 8,000 7,000 5,000 ( ) = 1,500 8,500 8,000 5,000 ( ) = 1,000 9,000 9,000 5,000 ( ) = 500 9,500 10,000 5,000 ( ) = 0 10,000

32 Wage Rate Subsidies Wage Rate Subsidies are government additions to wages designed to increase the pay of the working poor.

33 Wage Rate Subsidies Wage Paid Subsidy per Hour Total Wage Received $2.00 $1.50 $3.50 $2.50 $1.25 $3.75 $3.00 $1.00 $4.00 $3.50 $0.75 $4.25 $4.00 $0.50 $4.50 $4.50 $0.25 $4.75 $5.00 $0.00 $5.00

34 EITC The Earned Income Tax Credit goes to the working poor and varies with the number of children. Typically the recipient receives the assistance with their tax refund but papers can be filed to receive the money in their paychecks throughout the year.

35 EITC (1999; two-child family) Total Earned Income EITC $0 $0 $2,000 $810 $4,000 $1,610 $6,000 $2,410 $8,000 $3,210 $10,000 $3,816 $15,000 $3,265 $20,000 $2,212 $30,580 $0

36 Annual Disposable Income (I D ) Figure 7.10 A Negative Income Tax Plan Taxes Transfers I G 45º I B Annual Earned Income

37 Wisconsin Work s Stringent Work Requirements Child Care Subsidies Health Insurance Coverage Welfare dependency in WI has dropped 60% since 1987

38 Welfare Reform of 1996 Time Limits: 5-year lifetime limit 2-years at a time if states meet certain goals they can waive this rule for up to 20% of their caseloads. Work and Training: subsidized child care Teen Mothers: no longer eligible to receive their own payments must live with responsible adult. Refusal to work: recipients with children over five who refuse work can be denied aid and have their children placed in foster care

39 EITC (Dollars) Figure 7.11 Earned Income Tax Credit in 1999, By Number of Children and Earnings 4,000 Two or More Children 3,000 2,000 One Child 1,000 No Children 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Taxpayer s Earnings or Adjusted Gross Income (Dollars)

40 Programs to Aid the Poor and the Distribution of Money Income in the US Most of the War on Poverty began in the 1960s. The share of income going to each quintile (20% grouping) has remained constant during that time.

41 Share of Income Percent Share of Income by Quintile year lowest second third fourth highest