Income Distribution &
Welfare Programs
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Spending and Revenue of State and Local Governments
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Fiscal Federalism in the United States and Abroad
Fiscal Federalism Abroad
▪
TABLE 10-2
fiscal equalization Policies by
which the national government
distributes grants to
subnational governments in an
effort to equalize differences in
wealth.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Tax-benefit linkages
The relationship between the taxes people pay
and the government goods and services they get
in return.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Redistribution across Communities
There is currently enormous inequality in both
the ability of local communities to finance
public goods and the extent to which they do so.
Tools of Redistribution: Grants
If higher levels of government decide to
redistribute across lower levels of
government, they do so through
intergovernmental grants.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Redistribution across Communities
Tools of Redistribution: Grants
Matching Grants
Matching grant
A grant, the amount of which is tied to the amount
of spending by the local community.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Redistribution across Communities
Tools of Redistribution: Grants
Block
Grant
A grant of some fixed amount with no mandate on
how it is to be spent.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Tools of Redistribution: Grants
Conditional Block Grant
A grant of some fixed amount with a mandate
that the money be spent in a particular way.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Conclusion
In every country, the central government collects only part of
the total national tax revenues and does only part of the
national public spending.
When spending is on goods for which local preferences are
relatively similar, and where most residents can benefit from
those goods, spending should be done locally.
When spending is for goods that benefit only a minority of the
population, it might be difficult to do this spending locally
because the majority of people who do not benefit will not like
them.
Higher-level government may decides that it wants to
redistribute across lower levels, it can do so through several
different types of grants.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Social Insurance
What is insurance?
Individuals pay money to an insurer. These payments
are called premiums.
Insurer promises to make a payment to the individual
conditional on some event. e.g, flood insurance, Health
insurance, auto insurance
- insures against the cost of flood, illness, theft/
accident
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Reasons for insurance
1. Consumption smoothing -individuals tend to prefer
incomes that are similar in each period to wide
differences in incomes across periods.
2. Risk Averse behavior – people have different behavioral
pattern. Some people more careful than others
Different types of insurance plans to cater different
segments of society
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Health insurance
Individuals or firms pay monthly premiums to insurance
companies.
Insurance companies pay medical providers some of the
costs of medical care used by the individual.
Under most plans the individual also pays for some of the
costs.
Three types of payments:
Deductibles - individuals pay the full cost of care up to some
limit, i.e., you pay the first $100 of medical costs and the
insurance company pays the rest.
Copayment - individuals make a fixed payment every time
they get medical care, like $10 per doctor’s visit.
Coinsurance - individual pays a fixed percentage of each
medical bill.
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CHAPTER 10 ■ STATE AND LOCAL GOVERNMENT EXPENDITURES
Individuals buy insurance themselves
Employers provide insurance
Govt provides the insurance
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