Overview of Income Redistribution
Programs
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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
Programs
A. Means Tested Programs
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Programs directed at those falling below predetermined
income or asset level - poverty programs
Examples: medicaid, food stamps (SNAP), TANF
B. Non-means Tested Programs
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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
Poverty
Poverty 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 Programs
Means tested programs can be split into:
a. Cash transfer programs
a. 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. Medicaid
b. 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
EITC
Assume 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)
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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
TANF
TANF 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 Programs
1. 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 qualify
2. Food Stamp Program (now SNAP)
– Begun in 1971
3. Housing Assistance
Program
Amount (billions) in
2005
Percent of Federal
Spending
SSI
38
1.54
Family Support
(including TANF)
24
0.97
EITC and Child Credits
49
1.98
All Cash Transfers
111
4.49
Medicaid
182
7.36
Food Stamps (SNAP)
33
1.33
Child 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 Redistribution
Moral Hazard
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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
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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
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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
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In redistributing income, want to
target those subsidy recipients
who
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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
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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