Income Redistribution, Conceptual Issues Chapter 12

Contents 1 2 3 Distribution of income Expenditure incidence Rationales for Income redistribution 2 Expenditure incidence 3 www.themegallery.com Company Logo

Will provide framework for thinking about the normative(标准化的) and positive aspects of government income redistribution policy. www.themegallery.com Company Logo

Income Redistribution, Conceptual Issues The poverty line is a fixed level of real income which is considered enough to provide a minimally adequate standard of living. Inherently arbitrary, but still a useful benchmark. Trends over time Differences across groups www.themegallery.com Company Logo

b) To compute the number of people below the poverty line.(Table 12.2) a) The distribution of money income among households,(Table12.1) That inequality has increased over time. b) To compute the number of people below the poverty line.(Table 12.2) Poverty line for a family of four was $18,244 in 2001. Median household income more than double that, $42,228. www.themegallery.com Company Logo

Elderly have lower poverty rates than the U.S. average. Poverty rates in U.S. in 2001 might be considered surprisingly high – 11.7% for population as whole, 2004-12.7%. The figures suggest that the poverty rate is lower than it was a century ago . Howerve , the trend has not been steadily downward.(figure12.1) Concentrated among certain groups, such as female headed households, children, and minorities. Elderly have lower poverty rates than the U.S. average. www.themegallery.com Company Logo

Interpreting the Distributional Data 1.“Income” consists only of cash receipts. Excludes in-kind transfers like health insurance, food stamps, and housing. Would reduce poverty rate by more than 20%. Excludes non-market work such as childcare or housework. Ignores income flow from durable goods. 2. Income is before tax. It ignores cash refunds from the Earned Income Tax Credit, which has grown dramatically in the last decade, and now amounts to more than $31 billion annually. www.themegallery.com Company Logo

3.Income is measured annually. Income does fluctuate from year to year. Lifetime income considerations seem relevant. Consider a “starving” college student, for example. Not really “poor” in a lifetime sense. www.themegallery.com Company Logo

4.Unit of observation Person, households? Bauman (1997) calculates that including the income of nonfamily members (such as nonmarried cohabitors) would reclassify 55% of people who are poor out of official definition. www.themegallery.com Company Logo

Rationales for income redistribution The Maximin Criterion Pareto efficient income redistribution Nonindividualistic Views Simple Utilitarianism www.themegallery.com Company Logo

Rationales for income redistribution 1,Simple Utilitarianism: 1)Utilitarian social welfare function: W=F(U1,U2,….Un),the society welfare depends on the well-being of its members. 2)Additive social welfare function : W=U1+U2+….+Un 3)Suppose that the government’s goal is to maximize the value of W , then assumptions: www.themegallery.com Company Logo

With the additive SWF that was given, also assume: 1.Identical utility functions that depend only on income. 2.Diminishing marginal utility of income. 3.Society’s total income is fixed. Implication: government should redistribute to obtain complete equality. www.themegallery.com Company Logo

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Assumes identical utilities. Assumes decreasing marginal utility. Striking result is that full income equality should be pursued, but some scrutiny required. Assumes identical utilities. Assumes decreasing marginal utility. Assumes total income fixed www.themegallery.com Company Logo

The Maximin Criterion The Rawlsian social welfare function is: Social welfare in this case depends only on the utility of the person who has the lowest utility. Rawls (1971) asserts it has ethical validity because of the notion of original position. Notion that ex-ante individuals do not know where in the income distribution they will be. www.themegallery.com Company Logo

The Maximin Criterion The ethical validity of this proposition is controversial: 1,The maximin criterion has received considerable attention,principally because of philosopher John Rawls’s assertion that it has a special claim to ethical validity.Rawls’s argument relies on his notion of the original position, an imaginary situation in which people have no knowledge of what their place in society is to be.People adopt the maximin social welfare function because of the insurance it provides against disastrous outcomes.people are frightened that they may end up at the bottom of the income distribution, and therefore want the lever at the bottom as high as possible. www.themegallery.com Company Logo

These ethical claims are controversial: The Maximin Criterion These ethical claims are controversial: Still selfish view in original position Individuals extremely risk averse here All that is relevant is the welfare of the worst-off person, even if a policy is extremely detrimental to everyone else. www.themegallery.com Company Logo

Pareto efficient income redistribution Suppose that utility of richer person does depend on poorer person’s utility. That is: www.themegallery.com Company Logo

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Government redistribution in this case could improve efficiency Government redistribution in this case could improve efficiency. It may be difficult for the private market to do this, if, for example, the rich lack information on just who really is poor. Altruism plays a role in this example, but private market could conceivable give charity. www.themegallery.com Company Logo

Nonindividualistic views In previous cases, social welfare derived from individual’s utilities. Some specify what the income distribution should look like independent of individual preferences. One example: commodity egalitarianism. Right to vote, food, shelter, education, perhaps health insurance. www.themegallery.com Company Logo

Expenditure incidence Reasons for in-Kind Valuing in-Kind transfers Public goods Relative price effects www.themegallery.com Company Logo

Relative prices effects 1. Expenditure incidence The impact of expenditure policy on the distribution of real incomes. Relative Price Effects Public Goods Valuing In-Kind Transfers www.themegallery.com Company Logo

Relative Price Effects Suppose government subsidized housing of the poor. As a first pass, redistribution from rich to poor. May have overall effects on housing prices Landlords may reap part of gain. Affects wages of construction workers. Generally, any government program sets off a chain of price changes, and the incidence is unclear. www.themegallery.com Company Logo

Public Goods Do rich and poor benefit similarly from the provision of public goods? Difficult to measure, sensitive to assumptions that are made. www.themegallery.com Company Logo

Valuing In-kind Transfers Government provides many benefits to the poor in-kind – that is, direct provision of goods rather than cash. Food stamps Medicaid Public Housing Estimating value is difficult. Not always valued at dollar-for-dollar (if resale is difficult). www.themegallery.com Company Logo

An in –kind transfer results in a lower utility lever than a cash transfer A)An in –kind transfer results in a lower utility lever than a cash transfer www.themegallery.com Company Logo

An in –kind transfer can also result in the same utility lever as a cash transfer www.themegallery.com Company Logo

Why give in-kind transfers if they tend to be inefficient? Commodity egalitarianism May reduce welfare fraud (especially if the in-kind transfer is an inferior good) Politically viable because they help the producer of the in-kind good. www.themegallery.com Company Logo

The end