Copyright © 2002 by Thomson Learning, Inc. Chapter 7 Government Subsidies and Income Support for the Poor Copyright © 2002 Thomson Learning, Inc. Thomson

Copyright © 2002 by Thomson Learning, Inc.

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 0-03-033652-X


Poverty in 1998

34.5 million 13% of the population

classified as poor


Poverty in the United StatesPoverty threshold or poverty

line in 1999

Family Structure Threshold

Single $8,667

One Adult-Two Children $13,410

Two Adults-Two Children $16,600


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


Poverty Rate 1960-1998

0 1984 1979 1974 1969 1964 1959 1989 1999 1994

Numbers in millions, rates in percent

Note: The data points represent the midpoints of the respective years. The latest recession began in July 1990 and ended in March 1991.

Source: U.S. Census Bureau, Current Population Survey, March 1960-2000.

Number in poverty

Poverty rate

32.3 million

Recession

11.8 percent

45

40

35

30

25

20

15

10

5


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.


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.


Entitlement Programs

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.

Government programs that guarantee recipients benefits as long as they meet eligibility tests.


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.


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.


Major Federal Government Expenditures To Aid the Poor, 2000

Program Federal Spending Dollars (Billions)

Percentage of Federal Spending

SSI $29 1.64

TANF $21 1.16

EITC $26 1.47

Subtotal of Cash Programs $76 4.30

Medicaid $115 6.50

Food Stamps $19 0.28

Child Protection and Social Services

$5 0.79

Child Nutrition $11 8.48

Subtotal of In-Kind Programs $226 12.78


Price Distorting Subsidies

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


Figure 7.1 A Price Distorting SubsidyE

xpen

dit

ure

on

Oth

er G

oo

ds

per

Mo

nth

(D

oll

ars)

Housing Services per Month 0 L' H1 H2 H3

N3 N1 N2

S

I

B A

L

E1 E3

U2 U3 U1

E2

Subsidy


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.


Figure 7.2 Excess Burden of a Subsidy

B E

Q1

F

A

E’S’

D = MSB

400

200

Number of Apartments Rented

Q20

C

Ren

t (D

oll

ars

per

Mo

nth

)

S = MSC

Excess Burden of Subsidy


Figure 7.3 Full Subsidization of Medical Services

Medical Office Visits per Year0 Q*

E1

QG

25 = P*

E2

MBL

B

A

Pri

ce (

Do

llar

s p

er M

on

th)

Excess Burden


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.


Figure 7.4 The Impact of The Medicaid Program on Price: The Case of Increasing Cost

Pri

ce

(D

olla

rs)

Medical Office Visits per Year

0 QI O

Q'

E1

QL

35

Q2 QG QL

E2

25

S = MSC

DO DM = MSB

DL

D' M


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.


Figure 7.5 Eligibility for Public Housing and the Effect on Housing Consumption

Ex

pe

nd

itu

re o

n O

the

r G

oo

ds

pe

r M

on

th (

Do

llars

)

Housing per Month (Number of Rooms Rented) 0

800 = I

M

H

400= F J

B A

210

210

4

E1

U1 U2 U3

I'

1 3 2 5 6 7

90 G

E2


Figure 7.6 Refusing a Public-Housing SubsidyE

xp

en

dit

ure

on

Oth

er

Go

od

s p

er

Mo

nth

(D

olla

rs)

Housing per Month (Number of Rooms Rented)0

U3

E1 U2

I

M G

J

A 1 2 3 4 5 6 7


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.


Figure 7.7 The Impact of an In-Kind Transfer: Food Stamps

0

B

B

I

A

U2

U1

A'

M1

QF1

L

U3

QF

Ex

pe

nd

itu

re o

n O

the

r G

oo

ds

pe

r M

on

th (

Do

llars

)

0 QF

A

B

I

A

U2

U1

A'

M2

M1

QF1 QF2

Food per Month

C

Q* 1

F

QF2

E1

E1

CE2

E1


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.


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.


Figure 7.8 The Income Effect of a Transfer

Inco

me

per

Day

Leisure Hours per Day

0 L1 24

F

C

A

L2

D

U3

U2 U1

E1 E2

E3

G

TransferPayment


Figure 7.9 A Transfer that Declines with Earned Incomee.g. T=$300-.7IE

L* 24 L2 L1

MaximumDaily

Transfer

Leisure Hours per Day

Inco

me

per

Day

U2

U1

A

D

B

C E1

E2


Empirical Evidence

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


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 = IG – tNIE

Where IG = Income guarantee tN = take back rate IE = earned income T = Transfer


Break-Even Income

0 = IG – tNIB

IB = IG/tN


Negative Income Tax

Earned 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


Wage Rate Subsidies

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


Wage Rate SubsidiesWage Paid Subsidy

per HourTotal 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


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.


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


Figure 7.10 A Negative Income Tax Plan

IG

IB

An

nu

al D

isp

os

ab

le In

co

me

(I D

)

45º

Transfers

Taxes

Annual Earned Income


Wisconsin Work’s

Stringent Work Requirements Child Care Subsidies Health Insurance Coverage Welfare dependency in WI has dropped

60% since 1987


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


Figure 7.11 Earned Income Tax Credit in 1999, By Number of Children and Earnings

One Child

Two or More Children

No Children

0

1,000

2,000

3,000

4,000

EIT

C (

Do

llars

)

5,000 10,000 15,000

Taxpayer’s Earnings or Adjusted Gross Income (Dollars) 20,000 25,000 30,000 35,000


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.


Percent Share of Income by Quintile

year

Sh

are

of

Inco

me

lowest second third fourth highest

43

24

17

105

1947

1969

1973

1976

1983

1989

1995

1997

Documents

Copyright © 2002 by Thomson Learning, Inc. Chapter 7 Government Subsidies and Income Support for the Poor Copyright © 2002 Thomson Learning, Inc. Thomson