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Income redistribution

Income redistribution. Today: Conceptual issues Programs for the poor. Previously. Income redistribution through Social Security Redistribution from young to old Redistribution from rich to poor Redistribution from those that die young to those that die old. Today.

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Income redistribution

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  1. Income redistribution Today: Conceptual issues Programs for the poor

  2. Previously • Income redistribution through Social Security • Redistribution from young to old • Redistribution from rich to poor • Redistribution from those that die young to those that die old

  3. Today • More on income redistribution • Chapter 12 • Conceptual issues • Distribution of income • Rationales for redistribution • In-kind versus cash transfers • Chapter 13 • Various welfare programs for the poor • TANF, EITC, Supplemental Security Income, Medicaid, Unemployment insurance, Nutrition programs, Housing assistance, Education/Job training

  4. Conceptual issues • How is income distributed? • Is there such a thing as “too much” income inequality? • Why should there be redistribution? • Simple utilitarianism • Maximin criterion • In-kind versus cash transfers • When income is redistributed, should recipients be forced to consume a minimum amount of certain goods?

  5. Is there “too much” income inequality • Some people would argue yes • “Marginal utility of income is lower for somebody with high incomes” • “Each person has a right to a minimum standard of living” • “Social unrest may occur unless each person is above the poverty line”

  6. Is there “too much” income inequality • Some people would argue no • “When economic incentives to make a good living go away, the economic pie becomes smaller” • Think about communist systems • “People that have a good work ethic and work hard should make more money” • “There are plenty of opportunities for anybody born today in the US to become successful” • Free K-12 education; subsidized colleges and universities

  7. Absolute income • Real income growth, 1980-2000 • Bottom 20% has been flat • Top 20% has seen huge growth (59%) • Note that the “economic pie” is getting bigger • See also Table 12.1, p. 259, for more on this topic Source: “Principles of Microeconomics” 3rd edition, by Frank and Bernanke

  8. Problems with annual income figures • Ignores number of workers in a household • General trend from one earner to two • Expenses, such as child care, could be higher with in two-worker households • In-kind transfers ignored • Taxes change over time • Disposable income changes over time (given the same income) • Income changes over time • If a rich person earns no income in a calendar year, should she be considered “poor?”

  9. Different views of income redistribution • Some people believe that utility, not income, should be maximized within a population • Additive social welfare functionW = U1 + U2 + … + Un • See Figure 12.2, p. 264, for a model of optimal income distribution

  10. Different views of income redistribution • Others believe that social welfare should be the minimum of the utilities of each person in society • “Veil of ignorance” argument developed by John Rawls • Conceals knowledge and talents from people • Risk averse people will want to have income equality under these conditions • No inferiority, jealousy or envy based on income

  11. Different views of income redistribution • Commodity egalitarianism • Some things should be made available to everyone without restrictions • Right to vote (if 18 or older) • Basic education • “Needed” items such as food, shelter, and clothing • Basic medical care • Recall issues presented in Chapters 9 and 10

  12. Some other factors • Income redistribution does not directly take into account other factors • Number of hours worked • If our goal is to maximize utility from income, why not reduce leisure? • Not necessarily, since additional leisure likely increases utility • Income depends on number of hours worked • Does relative income matter? • Does someone get a decrease in utility when his income remains the same and someone else’s increase?

  13. In-kind versus money transfers • With some views, such as commodity egalitarianism, in-kind transfers have more appeal than monetary ones • How does this affect individual utility? • See Figures 12.3, p. 272, and 12.4, p. 273

  14. Summary: Conceptual issues • People have conflicting opinions as to whether or not there is too much income inequality • Most increases in income in recent decades have gone to the wealthiest of Americans • Some arguments support the use of in-kind transfers rather than monetary transfers

  15. Welfare programs for the poor • Over $500 billion in expenditures in 2002 • TANF • EITC • Supplemental Security Income • Medicaid • Unemployment insurance • Nutrition programs • Housing assistance • Education/Job training

  16. TANF • Temporary Assistance for Needy Families • Federal government provides block grants to states for welfare spending • Over 80% of recipients in every state must be on TANF for five years or less • States face penalties if a substantial percentage of recipients are not working or in work preparation programs

  17. TANF • TANF replaced Aid to Families with Dependent Children (AFDC) • Under AFDC, some argued that many women on AFDC had children out of wedlock to continue get benefits and not have to work • If the mother had to work once the child reached kindergarten, then there would be an economic incentive to have another child

  18. TANF and benefit reduction rates • TANF benefits are reduced when income reaches a certain level • Example: In California, recipients can earn up to $225 per month before benefits are reduced at a rate of 50% of money earned • How do people respond to these incentives in the short run?

  19. 0 Work incentives B = G – tE B = 0 if E = G/t The Basic Trade-offs G – basic grant if not working t – rate at which grant reduced when recipient earns money B – benefit received

  20. Analysis of work incentives • Figure 13.1, p. 281 • Budget constraint for leisure and income • Figure 13.2, p. 282 • Utility maximization based on the labor-leisure options

  21. Analysis of work incentives • Figure 13.4, p. 284 • In this example, someone can get $100 in TANF benefits if not working • Between point Q and point S, an implicit tax rate of 25% is imposed • Note that there are some incentives to work while still receiving benefits • Figure 13.6, p. 286 • In this case, a 100% implicit tax rate is imposed after a benefit of $338 is received

  22. Analysis of work incentives This person is indifferent between working and receiving benefits. See also Figure 13.7, p. 286, for a case in which an individual chooses to work. D E2 Income per month (= earnings + transfers) R P G Hours worked (if working) 0 T M Hours of leisure per month

  23. EITC • The earned income tax credit • A success story for the working poor • Provides credits to workers within low incomes • How it worked in 2006 for a family with 2 or more kids • 40% credit for first $11,340 earned • No additional credit for next $5,470 earned • Phased out at a 21.06% rate after $16,810 is earned, until the credit is gone at $38,348 earned • See Figure 13.8, p. 289, for two graphs about this

  24. What has the EITC done? • Households with nobody working • Encourages one person to work • Households with one person working • Additional work not encouraged once a family with 2+ kids earns $11,340 • Does not encourage additional hours of work of the person already working • Does not encourage a second worker in the household to work

  25. Supplemental Security Income (SSI) • Federal program that provides benefits for the aged, blind, and disabled with little or no assets • In 2003, average benefit was $342 • SSI recipients can earn up to $65 per month without loss in benefits • After $65 is earned, additional earnings have a 50% implicit tax rate

  26. Medicaid affects incentives to work Under old incentive structures, people often lost eligibility once they earned enough money to get off of welfare This created a “Medicaid notch” See Figure 13.9, p. 292 For main details about Medicaid, see Chapter 10 Medicaid

  27. Solving the Medicaid notch problem • In recent years, families that earn enough to leave welfare can often stay on Medicaid • 12 month coverage after leaving TANF • Low-income children and pregnant women

  28. Unemployment insurance (UI) • States provides insurance for unemployment due to adverse selection and moral hazard reasons • Benefits • Average weekly benefit in 2005: $266 • Maximum length of benefits in most states: 26 weeks • Typically financed by a payroll tax on employers • Empirical studies find that increasing benefits increases the duration of unemployment

  29. Food stamps • Many poor households are eligible for food stamps • Can only be used for purchasing domestically-produced food, excluding alcohol and animal food • 2004 averages • Monthly benefit was about $200 • 23.9 million people on food stamps in a given month

  30. Housing assistance • Public housing projects • Largest program, currently about 1.3 million units • When kids see building with everyone with low incomes, there are no role models for being successful • Crime is a big problem • Section 8 • Recipients rent a unit in the private market • Government provides subsidy if unit meets certain requirements

  31. Education and job training • Programs aimed at poor families • Head Start • Results mixed, but mostly positive • Training programs • Evidence shows that costs are higher than benefits • Job search programs • Not effective in increasing living standards of many people

  32. Overview • See Figure 13.10, p. 299 • Estimates marginal tax rates for a one-parent, two-child household residing in Wisconsin • Negative until about $10,000 per year • Over 40% from about $12,000-$31,000 per year

  33. Future of social insurance? • Academics are starting to study alternate ideas to help the poor • Providing benefits to those most in need, rather than those that are already “in the system” • “One-stop shopping” for help • Faith-based support • Government provides cash to the faith-based organization, and the organization provides the service

  34. Summary: Welfare programs for the poor • Many programs exist to support poor people • Some programs give little economic incentive to work • Exception: Earned income tax credit

  35. End of Unit 3 • Next lecture, begin Unit 4 • Tax-related topics • Read Chapters 14 and 15

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