Chapter 12: Low-Income Assistance Chapter 12 Low-Income Assistance Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 12: Low-Income Assistance Introduction Federal spending to assist low-income people The impact of assistance on poverty Refundable tax credits Unemployment compensation

Chapter 12: Low-Income Assistance Low-Income Assistance Cash assistance with no restrictions? Does it matter why people are poor? Citizens differ in their philosophy about providing assistance to low-income people: Voluntary contributions? Government assistance? Both?

Chapter 12: Low-Income Assistance Federal Spending to Assist Low-Income People Table 12.1 Federal Spending on Selected Programs in Fiscal Year 2007 ($ billions) Social Security$581 Medicare$436 Medicaid$191 Earned Income and Child Tax Credits$54 Aged, Blind, Disabled (SSI)$36 Food Stamps$35 Unemployment Compensation$33 Welfare (TANF) Family Support$24 Child Nutrition$14 Foster Care$7 State Children’s Health Insurance$6 Source: CBO, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (Jan. 2008), Table 3-3

Chapter 12: Low-Income Assistance Restricted assistance is limited in some way Unrestricted versus restricted assistance Unrestricted assistance is cash that the recipient can spend as he chooses Medicaid, food stamps, rental housing supplement Restricted assistance is larger than unrestricted assistance. Federal Spending to Assist Low-Income People Programs that are targeted to assist only low-income people are called means-tested

Chapter 12: Low-Income Assistance Provides health insurance for people with low income Medicaid Medicaid is a joint federal/state program Medicaid is an in-kind benefit Medicaid is an all or none program Medicaid … is the largest program that assists only low-income people.

Chapter 12: Low-Income Assistance Earned Income Tax Credit (EITC) … is a work bonus. EITC is “earned” by working. Benefit Earnings (a) EITC Benefit Earnings (b) Welfare Figure 12.1

Chapter 12: Low-Income Assistance Earned Income Tax Credit (EITC) EITC schedule for a married couple with two or more children EITC Benefit Earnings Figure 12.2 $4,800 $12,000$16,000$40,000 40% 20% The phase-in rate is 40% The phase-out rate is 20% EITC stays constant

Chapter 12: Low-Income Assistance Enacted in 1975 to offset the SS payroll tax History of the EITC Expanded in 1990 and 1993 EITC was viewed as an alternative to welfare The phase down rate is as though the person was being taxed Earned Income Tax Credit (EITC) The marginal tax rate generated by the phase-down of the EITC Under-participation and fraud exists The person faces a marginal tax rate of 20%

Chapter 12: Low-Income Assistance The NIT has never been enacted The EITC versus the Negative Income Tax (NIT) NIT gives the maximum benefit if income is zero NIT has the same benefit schedule as welfare, except for a flat range Earned Income Tax Credit (EITC) NIT gives a household a benefit to reduce the gap between the household’s income and a target income

Chapter 12: Low-Income Assistance A wage subsidy is an hourly benefit that depends on the hourly wage With a wage subsidy, benefits are paid to low-wage workers The EITC gives benefits to low-income workers Earned Income Tax Credit (EITC) The EITC versus a wage subsidy A wage subsidy gives a benefit to reduce the gap between the wage and a target wage

Chapter 12: Low-Income Assistance The EITC raises income while increasing employment The minimum wage has no budgetary costs Earned Income Tax Credit (EITC) The EITC versus the minimum wage Some workers who lose their jobs suffer a decrease in wage income Some workers who retain their jobs suffer an increase in wage income

Chapter 12: Low-Income Assistance The additional cost must be weighed against the additional benefit. Give a higher EITC for a third child to further reduce poverty Reform of the EITC Three possible changes: Further raise the EITC of married couples to reduce the possible marriage penalty Reduce the phase-out rate (marginal tax rate) to further encourage work

Chapter 12: Low-Income Assistance Each of these programs has different levels of support. Supplementary Security Income (SSI) Welfare Welfare does not encourage or reward work … gives a cash benefit to a family according to need. Federal welfare programs Federal food stamps Temporary Assistance for Needy Families (TANF)

Chapter 12: Low-Income Assistance Teenage mothers must live at home and go to school to receive benefits There is a work requirement Temporary Assistance for Needy Families Benefits and phase-down rates vary between states A joint federal/state program There is a time limit States receive block grants Provides cash benefits to low-income families when one parent is absent TANF replaced Aid to Families with Dependent Children (AFDC)

Chapter 12: Low-Income Assistance The Impact of Assistance on Poverty What is the impact on the poverty rate? Table 12.2 Poverty Rate (official) Before In-kind Government Programs and EITC Poverty Rate After all Government Programs %8.6% %10.1% %9.5% %10.5% %9% %7.6% %8.2% Source: 2004 Green Book, Committee on Ways and Means, U.S. House of Representatives, Table H-11

Chapter 12: Low-Income Assistance Higher education Refundable Tax Credits Retirement saving Possible refundable tax credits Health insurance Home ownership Advantages of refundable tax credits They can vary the amount of assistance with income The family uses the same process and bureaucracy each year

Chapter 12: Low-Income Assistance Unemployment Compensation Insurance has been developed for each of these contingencies Workers Compensation But an individual can lose his job, suffer an injury on the job, or become disabled Unemployment Insurance Disability Insurance An employed individual who is paid an adequate wage generally does not need assistance.

Chapter 12: Low-Income Assistance Summary Federal spending to assist low-income people The impact of assistance on poverty Refundable tax credits Unemployment compensation

Chapter 12: Low-Income Assistance Deficit versus debt The burden of debt U.S. deficits, debt, and interest during the past half century Preview of Chapter 13: Government Borrowing Inflation, debt, and deficits The long-term budget outlook for the U.S.