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Cash Versus Payment In Kind

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Presentation on theme: "Cash Versus Payment In Kind"— Presentation transcript:


2 Cash Versus Payment In Kind
Redistribution can be paid in cash or in kind Cash payments: Unemployment compensation Temporary Aid to Needy Families In kind payments: Food stamps Housing vouchers

3 Cash Payments and Utility Maximization
Cheaper to distribute cash payments Recipients best know their utility function Are in best position to know how transfer should be spent Cash transfer may make an individual better off than payment in kind

4 Cash Payments and Utility Maximization
Payment in Kind vs. Cash Transfer

5 Rationale for In-Kind Payments
Justified by considering utility of taxpayer In kind payments paternalistic Increase dependency on system by limiting ability to make decisions

6 Negative Income Tax Policy option to simplify transfer system
If person’s income below certain level, government pays person income supplement If income above that level, person pays tax

7 Negative Income Tax

8 Incentive to Substitute Into Leisure
Substitution effect - incentive to substitute leisure for income-earning activity Disincentive effects from income transfer no different from those of tax on earned income Substitution effect inevitable Transfer programs do not necessarily result in higher income

9 Incentive to Substitute Into Leisure
A Reduction in Income with a Negative Income Tax

10 Redistribution and Income of the Poor
Redistribution increases well-being of recipients May not appear to do so if only dollar figures examined Necessary to be poor to qualify for programs Disincentive to earn other income Redistributive programs do no simply add amount of redistributed income to income recipients would have without program

11 Excess Burden of Negative Income Tax
Substitution effect creates negative excess burden Applies to any transfer program reducing benefits to less needy

12 Excess Burden of Negative Income Tax

13 Excess Burden of Negative Income Tax
Virtues of Negative Income Tax Simple to administer Could reduce total number of transfer programs Cash transfer

14 Earned Income Tax Credit (EITC)
Closest program to negative income tax Created in 1975 Amount of credit varies Implies 20% marginal tax rate Given to taxpayer even if larger than amount of taxes due

15 Temporary Aid to Needy Families (TANF)
Created in 1997 Restricts recipients to maximum of 5 years of benefits Welfare rolls have declined since its inception Funding shared between federal and state governments Administered at state level Gives assistance to transition from welfare to work

16 Temporary Aid to Needy Families (TANF)
TANF replaced Aid to Families with Dependent Children (AFDC) AFDC gave incentive to remain on welfare

17 Work or Welfare

18 Food Stamps Established in 1964 to increase agricultural demand/provide better nutrition to low income families Financed by federal government and administered by states Provides benefits in kind 30% marginal tax rate May act like income transfer

19 Food Stamps Are Like a Cash Transfer

20 Food Stamps Effects Do not increase demand for agricultural products May not provide better nutrition Effects would be little different if replaced by cash transfer Underground market for food stamps

21 Food Stamps Selling Food Stamps

22 Housing Subsidies Low income housing Rent subsidies Low interest loans

23 Public Housing Government-owned apartment at below market rent
Individual can choose government housing or forgo subsidy Unlikely to provide same benefit level as cash transfer

24 Public Housing

25 Rent Subsidies Federal government expenditure Section 8 housing
Formula determines subsidy amount each recipient eligible for Creates disincentive for earning income Can spend money to rent any qualifying apartment

26 Rent Subsidies

27 Homelessness Most visible in major cities
Many suffer from drug/alcohol abuse or mental illness In urban areas individuals may not be able to afford minimum level of housing Makes it difficult to obtain employment

28 Homelessness

29 Homelessness Possible solutions:
Income transfer programs More inexpensive housing Public policy has removed much inexpensive housing from market

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