Chapter 7

Government Subsidies and Income Support for the Poor

Poverty in 2001

33 million people in U.S. affected

12% of the population classified as poor

Poverty in the United StatesPoverty threshold or poverty line in 2001

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

Poverty Rate 1960-2001

Why We Have Government Programs to Aid the Poor Concern about equity-efficiency trade-offs.

Creates the positive externality of social stability.

Entitlement Programs: Government programs that guarantee recipients benefits as long as they meet eligibility testsMeans 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.

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Cash Programs TANF: Temporary Aid to Needy FamiliesProgram most identified with a welfare check; may provide for child-care expenses or job retrainingSSI: Supplemental Security IncomeProgram provides cash payments to the widowed, orphaned and disabled.EITC: Earned Income Tax CreditA program that increases the take-home pay of the working poor by as much as $4140 in 2002 for a family with two children.

In-Kind Programs Food Stamps: vouchers that enable a broad class of poor people to purchase a wide variety of food productsWIC 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 poorThe Childrens Health Insurance Program: federal program that subsidizes health insurance coverage for the working poor.

Major Federal Government Expenditures To Aid the Poor, 2003

Price Distorting SubsidiesPrice Distorting Subsidies lower the price of a particular (subsidized) good relative to other goods for eligible people.

Figure 7.1 A Price Distorting Subsidy

Dead Weight Loss or Excess BurdenDead 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.

Figure 7.2 Excess Burden of a Subsidy

Figure 7.3 Full Subsidization of Medical Services B

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.

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

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.

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

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

Figure 7.8 The Income Effect of a TransferB

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

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

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

WhereIG = Income guaranteetN = take back rateIE = earned incomeT = Transfer

Break-Even Income0 = IG tNIB

IB = IG/tN

Negative Income Tax

Earned Income IETransfer T = IG tNIEDisposable Income ID05,0005,0001,0005,000 (.5 1000) = 4,5005,5002,0005,000 (.5 2000) = 4,0006,0003,0005,000 (.5 3000) = 3,5006,5004,0005,000 (.5 4000) = 3,0007,0005,0005,000 (.5 5000) = 2,5007,5006,0005,000 (.5 6000) = 2,0008,0007,0005,000 (.5 7000) = 1,5008,5008,0005,000 (.5 8000) = 1,0009,0009,0005,000 (.5 9000) = 5009,50010,0005,000 (.5 10000) = 010,000

EITCThe 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.

EITC (2002; two-child family)

Total Earned IncomeEITC$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

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

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 programssubsidized child careTeen 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.

Impact of Welfare ReformWelfare 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.

Percent Share of Income by Quintile