Cash Versus Payment In Kind Redistribution can be paid in cash or in kind Cash payments: Unemployment compensation Temporary Aid to Needy Families In kind payments: Food stamps Housing vouchers

Cash Payments and Utility Maximization Cheaper to distribute cash payments Recipients best know their utility function Are in best position to know how transfer should be spent Cash transfer may make an individual better off than payment in kind

Cash Payments and Utility Maximization Payment in Kind vs. Cash Transfer

Rationale for In-Kind Payments Justified by considering utility of taxpayer In kind payments paternalistic Increase dependency on system by limiting ability to make decisions

Negative Income Tax Policy option to simplify transfer system If person’s income below certain level, government pays person income supplement If income above that level, person pays tax

Negative Income Tax

Incentive to Substitute Into Leisure Substitution effect - incentive to substitute leisure for income-earning activity Disincentive effects from income transfer no different from those of tax on earned income Substitution effect inevitable Transfer programs do not necessarily result in higher income

Incentive to Substitute Into Leisure A Reduction in Income with a Negative Income Tax

Redistribution and Income of the Poor Redistribution increases well-being of recipients May not appear to do so if only dollar figures examined Necessary to be poor to qualify for programs Disincentive to earn other income Redistributive programs do no simply add amount of redistributed income to income recipients would have without program

Excess Burden of Negative Income Tax Substitution effect creates negative excess burden Applies to any transfer program reducing benefits to less needy

Excess Burden of Negative Income Tax

Excess Burden of Negative Income Tax Virtues of Negative Income Tax Simple to administer Could reduce total number of transfer programs Cash transfer

Earned Income Tax Credit (EITC) Closest program to negative income tax Created in 1975 Amount of credit varies Implies 20% marginal tax rate Given to taxpayer even if larger than amount of taxes due

Temporary Aid to Needy Families (TANF) Created in 1997 Restricts recipients to maximum of 5 years of benefits Welfare rolls have declined since its inception Funding shared between federal and state governments Administered at state level Gives assistance to transition from welfare to work

Temporary Aid to Needy Families (TANF) TANF replaced Aid to Families with Dependent Children (AFDC) AFDC gave incentive to remain on welfare

Work or Welfare

Food Stamps Established in 1964 to increase agricultural demand/provide better nutrition to low income families Financed by federal government and administered by states Provides benefits in kind 30% marginal tax rate May act like income transfer

Food Stamps Are Like a Cash Transfer

Food Stamps Effects Do not increase demand for agricultural products May not provide better nutrition Effects would be little different if replaced by cash transfer Underground market for food stamps

Food Stamps Selling Food Stamps

Housing Subsidies Low income housing Rent subsidies Low interest loans

Public Housing Government-owned apartment at below market rent Individual can choose government housing or forgo subsidy Unlikely to provide same benefit level as cash transfer

Public Housing

Rent Subsidies Federal government expenditure Section 8 housing Formula determines subsidy amount each recipient eligible for Creates disincentive for earning income Can spend money to rent any qualifying apartment

Rent Subsidies

Homelessness Most visible in major cities Many suffer from drug/alcohol abuse or mental illness In urban areas individuals may not be able to afford minimum level of housing Makes it difficult to obtain employment

Homelessness

Homelessness Possible solutions: Income transfer programs More inexpensive housing Public policy has removed much inexpensive housing from market