1. Overview of Income Redistribution Programs
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

2. Programs
Means Tested Programs
Programs directed at those falling below predetermined income or asset level - poverty programs
Examples: medicaid, food stamps (SNAP), TANF
Non-means Tested Programs
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

3. 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

4. Poverty rate in recent years
Poverty thresholds
Poverty rate in recent years
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%

5. Poverty Rates over Time in the United States
17.1
Poverty Rates over Time in the United States
Poverty rates declined rapidly in 1960s and early 1970s and then oscillated for all age groups. Poverty rates began to decline again after 2010.

6. Anti-poverty Programs
Means tested programs can be split into:
Cash transfer programs
Earned Income Tax Credit (EITC)
Temporary Assistance to Needy Families (TANF)
Supplemental Security Income (SSI)
In-kind programs (direct provision of goods/services by government)
Medicaid
Food Stamps (SNAP)
Housing Assistance

7. 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

8. EITC Characteristics of the EITC program
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)
Characteristics of the EITC program

9. Temporary Assistance to Needy Families (TANF)
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
The federal government would determine eligibility
States would determine size of cash benefits

10. TANF
TANF is a federal program directed at same group as AFDC
States now have almost complete discretion over who receives benefits and the form of benefits
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.
The number of people within TANF fell compared to the program it replaced (AFDC)

11. APPLICATION: Evaluating the 1996 Welfare Reform
17.4
APPLICATION: Evaluating the 1996 Welfare Reform
Note the association between the timing of this law and the reduction in welfare caseloads. After reaching a peak in 1994, welfare caseloads had declined by more than three-fourths by 2014.

12. In Kind Anti-poverty Programs
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
Food Stamp Program (now SNAP)
Begun in 1971
Housing Assistance

13. Percent of Federal Spending
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

14. 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

15. The Economics of Income Redistribution
Moral Hazard
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

16. Moral Hazard
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

17. 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

18. The Economics of Income Redistribution
Income Subsidy
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)

19. 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.

20. Model of Guaranteed Income Program with 100% Benefit Reduction

21. Model of Guaranteed Income Program with 50% Benefit Reduction

22. The Economics of Income Redistribution
In redistributing income, want to target those subsidy recipients who
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

23. 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

24. 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

25. The Economics of Income Redistribution
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