2. 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

3. 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

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

5. 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

6. 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

7. Negative Income Tax

8. 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

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

10. 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

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

12. Excess Burden of Negative Income Tax

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

14. 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

15. 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

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

17. Work or Welfare

18. 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

19. Food Stamps Are Like a Cash Transfer

20. 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

21. Food Stamps
Selling Food Stamps

22. Housing Subsidies
Low income housing
Rent subsidies
Low interest loans

23. 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

24. Public Housing

25. 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

26. Rent Subsidies

27. 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

28. Homelessness

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