Download - Overview of Income Redistribution Programs
Overview of Income Redistribution Programs
• Federal government plays large role redistributing income and supporting income of various groups
• Programs decrease uncertainty generated by market economy
• 2 broad categories of social insurance/redistribution programs
ProgramsA. Means Tested Programs
• Programs directed at those falling below predetermined income or asset level - poverty programs
• Examples: medicaid, food stamps (SNAP), TANF
B. Non-means Tested Programs• Eligibility for program not determined by income means
test• Other criteria (for example age) establish eligibility; most
people fall under program at some point• Examples: unemployment insurance, social security
pension system, medicare
Non-means tested programs much larger than means tested programs
Poverty in US• Families and individuals classified as poor
if their incomes fall under a calculated poverty threshold
• Threshold varies by family characteristics, (family size etc)
• Threshold constructed as function of income needed to maintain adequate diet; Assumed families spend 1/3 of income on food
PovertyPoverty thresholds• In 2014 14.8% of the population under
poverty line• Only cash income (regardless of source)
is used to establish poverty status• Poverty has fallen in US since first
calculated – in 1959 the poverty rate was 22.4%– In 2007 (pre-recession) poverty rate was
12.5%
Anti-poverty ProgramsMeans tested programs can be split into:
a. Cash transfer programsa. Earned Income Tax Credit (EITC)b. Temporary Assistance to Needy Families (TANF)c. Supplemental Security Income (SSI)
b. In-kind programs (direct provision of goods/services by government)a. Medicaidb. Food Stamps (SNAP)c. Housing Assistance
Earned Income Tax Credit
• Second largest federal anti-poverty program after medicaid
• Program began in 1970’s, greatly expanded in 1993
• Program directed at working poor, only those earning wages are eligible
• EITC is a system of direct income subsidies administered thru the tax system
EITCAssume a single woman with one child in 2003 with
$15,600 adjusted gross income-7000 standard deduction (head of household)-6,200 exemptions (herself and child)-----------------------------------------------------------------------$2,400 taxable income$240 tax owed before EITC
• Value of EITC subsidy - $2,248• The woman would pay no income taxes and receive a
$2008 refund ($2248-$240)• Current income thresholds and maximum credit limits in
program• Size of the EITC program
Temporary Assistance to Needy Families (TANF) • In 1996, TANF replaced the federal
entitlement program called Aid to Families with Dependent Children (AFDC)
• Directed at non-working families with children
• The old AFDC program consisted mainly of cash subsidies in which
1. The federal government would determine eligibility
2. States would determine size of cash benefits
TANFTANF is a federal program directed at same group as
AFDC 1. States now have almost complete discretion
over who receives benefits and the form of benefits
2. Generally fewer strings created by federal government but recipients are allowed federally subsidized cash benefits for a maximum of 5 years. States had option of lowering this limit.
3. The number of people within TANF fell compared to the program it replaced (AFDC)
In Kind Anti-poverty Programs1. Medicaid
– Single largest anti-poverty program – Medical insurance provided by federal
government for those who pass means test– Cost of program is shared with states and
program is administered by individual states– Most families with incomes below 130% of
poverty level will qualify2. Food Stamp Program (now SNAP)
– Begun in 19713. Housing Assistance
Program Amount (billions) in 2005
Percent of Federal Spending
SSI 38 1.54Family Support (including TANF)
24 0.97
EITC and Child Credits 49 1.98All Cash Transfers 111 4.49
Medicaid 182 7.36Food Stamps (SNAP) 33 1.33Child nutrition, health, foster care and Social Services
29 1.17
All In-kind Transfers 244 9.87
Total 356 14.35
Anti-poverty Programs
• Cash benefit anti-poverty programs make up small percentage of federal expenditures
• In kind benefits for poor much larger than cash benefits
• Over half of federal anti-poverty expenditures are in Medicaid–Medicaid larger than all cash benefits
programs combined
The Economics of Income RedistributionMoral Hazard
• Redistributing income from one group to another may change the behavior of both groups
• This change in behavior increases uncertainty regarding the governmental cost of the program; may also give rise to unanticipated changes in total output in economy
Moral Hazard
• Assume taxes increased for one group to redistribute income to another, this may reduce work effort for those whose taxes increased
• The redistribution of income may also affect the work incentive of those receiving the subsidy
The Economics of Income Redistribution
Assumptions for simple model:• One wage earner per household• Worker’s wage is $12.50/hour• Wage earner can work a maximum of
2000 hours per year (8 hours a day times 5 days a week times 50 weeks a year)
• Wage earner able to choose between work hours and leisure time
The Economics of Income Redistribution
Income Subsidy • Assume a program that guarantees a
minimum income ($9,000) to each American family
• Every family that earns an income below $9,000 receives subsidy to bring income up to $9,000 level
• Every dollar that a family earns below $9,000 means one less dollar in subsidy (a family with an earned income of $5,000 will get a subsidy of $4,000; a family with an earned income of $5,001 will receive $3,999)
The Economics of Income Redistribution
Families with earned income over $9,000 receive no subsidy
Program effectively amounts to a 100% tax for those with earned incomes below $9,000.
Model of Guaranteed Income Program with 100% Benefit Reduction
Model of Guaranteed Income Program with 50% Benefit Reduction
The Economics of Income Redistribution• In redistributing income, want to
target those subsidy recipients who• have low incomes due to low capacity to earn
income in labor market• not those who have high ability to earn but
choose to consume more leisure time• therefore, will not change their behavior in the
labor market due to the subsidy
The Economics of Income Redistribution
Example of a target group for income distribution
Single mothers• Poverty rate for families headed by single
woman is almost 3 times the national average
• Little evidence that people become single mothers due to income subsidies
The Economics of Income Redistribution• Redistribution programs may attempt to
distinguish between those with low earnings capacity and those who value leisure by setting making program unattractive for recipients
• Ordeal mechanism: only those who are truly less capable of earning in the labor market will suffer ordeal in subsidy program.
Work and Training requirements that are part of TANF programs in many states
Eligibility requirements in SNAP
The Economics of Income Redistribution• Economic theory suggests cash subsidies in
some cases are a more efficient method than in-kind programs to redistribute income
• If in-kind benefits do not dramatically alter the choices open to a recipient, compared to an equivalent cash subsidy, it may be more efficient to provide cash
Example: Food Vouchers