1 TANF Temporary Assistance to Needy Families - replaced AFDC in 1996

2 There is an “Iron Triangle of Welfare” and the basic idea is that there are conflicting policy goals in terms of alleviating poverty, providing incentives to work and limiting costs of the program by keeping the number of recipients down. TANF (Temporary Assistance to Needy Families) is the current plan of the government to help the impoverished. We will look at the provisions of TANF and see how the Iron Triangle results. The program 1) An income guarantee - G -So a person who has zero hours of work would get G. 2) The level of disregard - D - The amount a family can earn without having the benefit reduced.

3 3) Implicit tax rate - t - The “tax” rate on earnings over the level of disregard. Not income tax, but a penalty from earning in terms of having G reduced. 4) Breakeven point BE = D + G/t - the level of income earned where a person no longer receives any TANF. Example to highlight some ideas: Person has up to 100 hours per week of work or leisure, can earn $6.50 per hour, say G = $200, D = 0, and t = 0.60 (this means for each dollar earned by work, G goes down by 60 cents). Notice BE = /.6 =

4 Hours of leisure Income $650 $292.5 Here the person makes $6.50 an hour. With preferences for leisure and work the individual decides to work 45 hours per week and make $ No TANF

5 With TANF hours workincome (.6) = (1-.6)6.50 = (13) = So for each hour of work the person makes $2.60 more per hour. We see the new budget on the next slide.

6 Hours of leisure Income $650 $292.5 a b x

7 The introduction of TANF has the individual move from a to b in the graph. The movement from a to x is the income effect and from x to b is the substitution effect. Income effect - give money in program, buy more leisure - if leisure is a normal good. Substitution effect - wage is lowered (due to the tax), leisure is less expensive and people will take more leisure. Under TANF the income and sub. effects both indicate more leisure would be taken.

8 Iron Triangle Higher G, alleviating poverty, means more people want in the program and thus the cost of the program rises. Holding costs down means don’t have many people in the program. This could be done by having low G, but then poverty is not alleviated. High t means there is little, or no, incentive to work. So, it is hard to achieve all three goals at the same time.