Government Subsidies and Income Support for the Poor Chapter 7 Government Subsidies and Income Support for the Poor

Poverty in 2001 33 million people in U.S. affected 12% of the population classified as poor

Poverty in the United States Poverty threshold or poverty line in 2001 Family Structure Threshold ($ income annually) Single $9,214 One Adult-Two Children $14,269 Two Adults-Two Children $17,960

Poverty line Poverty Line: originally created by the Social Security Administration as three times the cost of a nutritionally adequate diet Updated annually for inflation using the CPI

Poverty Rate 1960-2001

Why We Have Government Programs to Aid the Poor Concern about equity-efficiency trade-offs. Creates the positive externality of social stability.

Entitlement Programs: Government programs that guarantee recipients benefits as long as they meet eligibility tests . Means Tests: typically income and wealth criteria that must be met for an individual or family to be eligible for a program Status Tests: typically disability, children, and age criteria that must be met for an individual or family to be eligible for a program.

Cash Programs TANF: Temporary Aid to Needy Families Program most identified with a welfare check; may provide for child-care expenses or job retraining SSI: Supplemental Security Income Program provides cash payments to the widowed, orphaned and disabled. EITC: Earned Income Tax Credit A program that increases the take-home pay of the working poor by as much as $4140 in 2002 for a family with two children.

In-Kind Programs Food Stamps: vouchers that enable a broad class of poor people to purchase a wide variety of food products WIC vouchers: enable poor, pregnant, and post-natal women to purchase a narrow variety of food products. Medicaid: federal and state funded program that provides health care services to the poor The Children’s Health Insurance Program: federal program that subsidizes health insurance coverage for the working poor.

Major Federal Government Expenditures To Aid the Poor, 2003 Program Federal Spending Dollars (Billions) Percentage of Federal Spending SSI $32 1.52 TANF $26 1.23 EITC $35 1.66 Subtotal of Cash Programs $93 4.41 Medicaid $155 7.36 Food Stamps $24 1.14 Child Protection and Social Services $4 0.52 Child Nutrition $11 9.21 Subtotal of In-Kind Programs $287 13.62

Price Distorting Subsidies Price Distorting Subsidies lower the price of a particular (subsidized) good relative to other goods for eligible people.

Figure 7.1 A Price Distorting Subsidy H1 N1 E1 U1 Expenditure on Other Goods per Month (Dollars) Housing Services per Month L' L U2 E2 I A B H3 N3 E3 H2 N2 S Subsidy

Dead Weight Loss or Excess Burden Dead Weight Loss (sometimes called Excess Burden ) measures the extra benefit a recipient can enjoy from the dollar amount of the price-distorting subsidy if instead the grant was received in a lump sum.

Figure 7.2 Excess Burden of a Subsidy Number of Apartments Rented Rent (Dollars per Month) D = MSB A Excess Burden of Subsidy B E Q1 400 S = MSC Q2 F E’ S’ 200 C

Figure 7.3 Full Subsidization of Medical Services Medical Office Visits per Year Price (Dollars per Month) B MBL Q* E1 QG E2 A 25 = P* Excess Burden

Additional Effects of Subsidies: The Case of Increasing Costs Taxpayers face a double burden: not only must they pay Medicaid costs through taxes,the program also increases the amount non-eligible patients pay for medical services by increasing demand for those services.

Figure 7.4 The Impact of The Medicaid Program on Price: The Case of Increasing Cost Price (Dollars) Medical Office Visits per Year S = MSC 35 Q2 E2 DO DL DM' DM = MSB QO' QI E1 25 QL QO QG

Subsidizing Food Food Stamps: subsidies that allow recipients particular allotments of vouchers to buy food, but recipients may supplement the subsidy with their own cash. It is illegal to sell food stamps, though it may be in the recipients’ interests to do so.

Figure 7.7 The Impact of an In-Kind Transfer: Food Stamps B Expenditure on Other Goods per Month (Dollars) A Food per Month B F U3 A' B L E2 QF* C QF I U2 I A U1 M1 QF1 E1 U2 A U1 QF2 E1 M1 QF C A' M2 QF2 E2

The Impact of Government Assistance Programs on Work Transfers could cause people to work more or less, depending on whether leisure is a normal good.

Figure 7.8 The Income Effect of a Transfer Income per Day Leisure Hours per Day 24 U3 E3 C L2 U2 E2 A L1 U1 E1 D Transfer Payment B

Figure 7. 9 A Transfer that Declines with Earned Income e. g. T=$300- Figure 7.9 A Transfer that Declines with Earned Income e.g. T=$300-.7IE 24 Leisure Hours per Day Income per Day A B U2 U1 L* C L2 E2 L1 E1 Maximum Daily Transfer D

Empirical Evidence A 10% increase in welfare payments to individuals decreases work effort by 2%.

Negative Income Tax T = IG – tNIE The Negative Income Tax is a system with no status test, but there is an income guarantee and a take-back rate. T = IG – tNIE Where IG = Income guarantee tN = take back rate IE = earned income T = Transfer

Break-Even Income 0 = IG – tNIB IB = IG/tN

Negative Income Tax Earned Income IE Transfer T = IG – tNIE Disposable Income ID 5,000 1,000 5,000 – (.5 × 1000) = 4,500 5,500 2,000 5,000 – (.5 × 2000) = 4,000 6,000 3,000 5,000 – (.5 × 3000) = 3,500 6,500 4,000 5,000 – (.5 × 4000) = 3,000 7,000 5,000 – (.5 × 5000) = 2,500 7,500 5,000 – (.5 × 6000) = 2,000 8,000 5,000 – (.5 × 7000) = 1,500 8,500 5,000 – (.5 × 8000) = 1,000 9,000 5,000 – (.5 × 9000) = 500 9,500 10,000 5,000 – (.5 × 10000) = 0

EITC The Earned Income Tax Credit goes to the working poor and varies with the number of children. Typically, recipients receive the assistance with their tax refund, but papers can be filed to receive the money in their paychecks throughout the year.

EITC (2002; two-child family) Total Earned Income EITC $0 $2,000 $810 $4,000 $1,610 $6,000 $2,410 $8,000 $3,210 $10,000 $4,140 $15,000 $3,823 $20,000 $2,770 $33,200

Figure 7.11 Earned Income Tax Credit in 1999, By Number of Children and Earnings

Welfare Reform of 1996 Time Limits: 5-year lifetime limit 2-years at a time If states meet certain goals, they can waive this rule for up to 20% of their caseloads. Work and Training: Half a states TANF recipients must be in work programs subsidized child care  Teen Mothers: no longer eligible to receive their own payments must live with responsible adult.  Refusal to work: If recipients have children over five and the parents refuse to work, families can be denied aid and children may be placed in foster care.

Impact of Welfare Reform Welfare caseloads have declined. Labor force participation among less-skilled single mothers has increased more than expected. State governments have greatly increased their spending for work support programs, including: child care subsidies, transportation subsidies, help with job search expenses, subsidized wages.

Percent Share of Income by Quintile Year LowestFifth Second Fifth Third Fifth Fourth Fifth Highest Fifth 1947 5.0 11.9 17.0 23.1 43.0 1967 4.0 11.1 17.6 24.6 42.7 1976 4.3 10.4 24.7 43.6 1987 3.8 9.6 16.1 23.3 46.7 1997 3.6 8.9 15.0 22.2 49.4 2001 3.5 8.7 14.6 23.0 50.1