1 chapter 7 government subsidies and income support for the poor
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1
Chapter 7
Government Subsidies and Income Support for the Poor
2
Poverty in 2001
33 million people in U.S. affected
12% of the population classified as poor
3
Poverty in the United StatesPoverty threshold or poverty line
in 2001 Family Structure Threshold ($
income annually)
Single $9,214
One Adult-Two Children $14,269
Two Adults-Two Children $17,960
4
Poverty line Poverty Line: originally created by the
Social Security Administration as three times the cost of a nutritionally adequate diet
Updated annually for inflation using the CPI
5
Poverty Rate 1960-2001
6
Why We Have Government Programs to Aid the Poor
Concern about equity-efficiency trade-offs.
Creates the positive externality of social stability.
7
Entitlement Programs: Government programs that guarantee recipients benefits as long as they meet eligibility tests
Means Tests: typically income and wealth criteria that must be met for an individual or family to be eligible for a program
Status Tests: typically disability, children, and age criteria that must be met for an individual or family to be eligible for a program.
.
8
Cash Programs TANF: Temporary Aid to Needy Families
Program most identified with a welfare check; may provide for child-care expenses or job retraining
SSI: Supplemental Security Income Program provides cash payments to the
widowed, orphaned and disabled.
EITC: Earned Income Tax Credit A program that increases the take-home
pay of the working poor by as much as $4140 in 2002 for a family with two children.
9
In-Kind Programs Food Stamps: vouchers that enable a broad
class of poor people 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: federal and state funded program that provides health care services to the poor
The Children’s Health Insurance Program: federal program that subsidizes health insurance coverage for the working poor.
10
Major Federal Government Expenditures To Aid the Poor, 2003Program Federal
Spending Dollars (Billions)
Percentage of Federal Spending
SSI $32 1.52
TANF $26 1.23
EITC $35 1.66
Subtotal of Cash Programs $93 4.41
Medicaid $155 7.36
Food Stamps $24 1.14
Child Protection and Social Services
$4 0.52
Child Nutrition $11 9.21
Subtotal of In-Kind Programs $287 13.62
11
Price Distorting Subsidies
Price Distorting Subsidies lower the price of a particular (subsidized) good relative to other
goods for eligible people.
12
Figure 7.1 A Price Distorting Subsidy
B
I
A L'
L
H2
N2
Exp
end
itu
re o
n O
ther
Go
od
s p
er M
on
th (
Do
llar
s)
Housing Services per Month 0
U3
H3
N3 E3
U2
E2
H1
N1 E1
U1
S
Subsidy
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Dead Weight Loss or Excess Burden
Dead Weight Loss (sometimes called Excess Burden ) measures the extra benefit a recipient can enjoy from the dollar amount of the price-distorting subsidy if instead the grant was received in a lump sum.
14
Figure 7.2 Excess Burden of a Subsidy
B E
Q1
D = MSB
Q2
F E’S’200
C
Number of Apartments Rented
0
Ren
t (D
oll
ars
per
Mo
nth
)
400 S = MSCA
Excess Burden of Subsidy
15
Figure 7.3 Full Subsidization of Medical Services
B
25 = P*
MBL
QG
E2
A
Q*
E1
Medical Office Visits per Year0
Pri
ce (
Do
llar
s p
er M
on
th)
Excess Burden
16
Additional Effects of Subsidies: The Case of Increasing Costs
Taxpayers face a double burden: not only must they pay Medicaid costs through taxes,the program also increases the amount non-eligible patients pay for medical services by increasing demand for those services.
17
Figure 7.4 The Impact of The Medicaid Program on Price: The Case of Increasing Cost
QG
S = MSC
QO' QL QO
DM = MSB
QI
E1 25
Pri
ce
(D
olla
rs)
Medical Office Visits per Year
0
DO DL
DM'
35
Q2
E2
18
Subsidizing FoodFood Stamps: subsidies that allow recipients particular allotments of vouchers to buy food, but recipients may supplement the subsidy with their own cash. It is illegal to sell food stamps, though it may be in the recipients’ interests to do so.
19
Figure 7.7 The Impact of an In-Kind Transfer: Food Stamps
A' 0
B
Ex
pe
nd
itu
re o
n O
the
r G
oo
ds
pe
r M
on
th (
Do
llars
)
0
A
Food per Month
B
F
U3
A'
B
LE2
QF*
A
U1
QF2
E1
M1C
QF
I
U2
U2
M2
QF2
E2
QF
C I
A
U1
M1
QF1
E1
20
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.
21
Figure 7.8 The Income Effect of a Transfer
A
Inco
me
per
Day
Leisure Hours per Day
0 24 L1
U1
E1
C
L2
U2
E2
U3
E3
F
G
D TransferPayment B
22
Figure 7.9 A Transfer that Declines with Earned Income e.g. T=$300-.7IE
24 Leisure Hours per Day
Inco
me
per
Day
U1 MaximumDaily
Transfer
D
A
B L*
C
L1
E1 U2
L2
E2
23
Empirical Evidence A 10% increase in welfare payments to
individuals decreases work effort by 2%.
24
Negative Income Tax The Negative Income Tax is a system with no status
test, but there is an income guarantee and a take-back rate.
T = IG – tNIE
Where IG = Income guarantee tN = take back rate IE = earned income T = Transfer
25
Break-Even Income
0 = IG – tNIB
IB = IG/tN
26
Negative Income TaxEarned Income IE Transfer T = IG – tNIE Disposable Income ID
0 5,000 5,000
1,000 5,000 – (.5 × 1000) = 4,500 5,500
2,000 5,000 – (.5 × 2000) = 4,000 6,000
3,000 5,000 – (.5 × 3000) = 3,500 6,500
4,000 5,000 – (.5 × 4000) = 3,000 7,000
5,000 5,000 – (.5 × 5000) = 2,500 7,500
6,000 5,000 – (.5 × 6000) = 2,000 8,000
7,000 5,000 – (.5 × 7000) = 1,500 8,500
8,000 5,000 – (.5 × 8000) = 1,000 9,000
9,000 5,000 – (.5 × 9000) = 500 9,500
10,000 5,000 – (.5 × 10000) = 0 10,000
27
EITC The Earned Income Tax Credit goes to
the working poor and varies with the number of children. Typically, recipients receive the assistance with their tax refund, but papers can be filed to receive the money in their paychecks throughout the year.
28
EITC (2002; 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 $4,140
$15,000 $3,823
$20,000 $2,770
$33,200 $0
29
Figure 7.11 Earned Income Tax Credit in 1999, By Number of Children and Earnings
30
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: Half a states TANF recipients must be in work programs subsidized child care
Teen Mothers: no longer eligible to receive their own payments must live with responsible adult.
Refusal to work: If recipients have children over five and the parents refuse to work,
families can be denied aid and children may be placed in foster care.
31
Impact of Welfare Reform Welfare caseloads have declined.
Labor force participation among less-skilled single mothers has increased more than expected.
State governments have greatly increased their spending for work support programs, including: child care subsidies, transportation subsidies, help with job search expenses, subsidized wages.
32
Percent Share of Income by Quintile
Year LowestFifth
Second Fifth
Third Fifth
Fourth Fifth
Highest Fifth
1947 5.0 11.9 17.0 23.1 43.0
1967 4.0 11.1 17.6 24.6 42.7
1976 4.3 10.4 17.0 24.7 43.6
1987 3.8 9.6 16.1 23.3 46.7
1997 3.6 8.9 15.0 22.2 49.4
2001 3.5 8.7 14.6 23.0 50.1
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