Holcombe 19

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CHAPTER

Government RedistributionGovernment Redistribution

ProgramsPrograms

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall ol!ombe

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Randall ol!ombe 19-2

Cash Versus Payment In KindCash Versus Payment In Kind

Redistribution !an be "aid in !as# or inRedistribution !an be "aid in !as# or in

$ind$ind

Cas# "a%ments:Cas# "a%ments: Unem"lo%ment !om"ensationUnem"lo%ment !om"ensation

Tem"orar% &id to Need% 'amiliesTem"orar% &id to Need% 'amilies

In $ind "a%ments:In $ind "a%ments: 'ood stam"s'ood stam"s

ousing vou!#ersousing vou!#ers

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Cash Payments and UtilityCash Payments and Utility

MaximizationMaximization C#ea"er to distribute !as# "a%mentsC#ea"er to distribute !as# "a%ments

Re!i"ients best $no( t#eir utilit% )un!tionRe!i"ients best $no( t#eir utilit% )un!tion

&re in best "osition to $no( #o( trans)er&re in best "osition to $no( #o( trans)ers#ould be s"ents#ould be s"ent

Cas# trans)er ma% ma$e an individualCas# trans)er ma% ma$e an individual

better o)) t#an "a%ment in $indbetter o)) t#an "a%ment in $ind

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Cash Payments and UtilityCash Payments and Utility

MaximizationMaximization

Payment in Kindvs.

Cash Transer

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Rationale or In!KindRationale or In!Kind

PaymentsPayments *usti)ied b% !onsidering utilit% o)*usti)ied b% !onsidering utilit% o)

ta+"a%erta+"a%er

In $ind "a%ments "aternalisti!In $ind "a%ments "aternalisti! In!rease de"enden!% on s%stem b% limitingIn!rease de"enden!% on s%stem b% limiting

abilit% to ma$e de!isionsabilit% to ma$e de!isions

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"e#ative In$ome Tax"e#ative In$ome Tax

Poli!% o"tion to sim"li)% trans)er s%stemPoli!% o"tion to sim"li)% trans)er s%stem

I) "erson,s in!ome belo( !ertain level-I) "erson,s in!ome belo( !ertain level-

government "a%s "erson in!omegovernment "a%s "erson in!omesu""lementsu""lement

I) in!ome above t#at level- "erson "a%sI) in!ome above t#at level- "erson "a%s

ta+ta+

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"e#ative In$ome Tax"e#ative In$ome Tax

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In$entive to %u&stitute IntoIn$entive to %u&stitute Into

'eisure'eisure Substitution e))e!t . in!entive toSubstitution e))e!t . in!entive to

substitute leisure )or in!ome.earningsubstitute leisure )or in!ome.earninga!tivit%a!tivit%

/isin!entive e))e!ts )rom in!ome trans)er/isin!entive e))e!ts )rom in!ome trans)erno di))erent )rom t#ose o) ta+ on earnedno di))erent )rom t#ose o) ta+ on earnedin!omein!ome

Substitution e))e!t inevitableSubstitution e))e!t inevitable Trans)er "rograms do not ne!essaril%Trans)er "rograms do not ne!essaril%

result in #ig#er in!omeresult in #ig#er in!ome

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In$entive to %u&stitute IntoIn$entive to %u&stitute Into

'eisure'eisure

A Redu$tion in

In$ome (ith a"e#ative In$ome

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Redistri&ution and In$ome oRedistri&ution and In$ome o

the Poorthe Poor Redistribution in!reases (ell.being o) re!i"ientsRedistribution in!reases (ell.being o) re!i"ients

Ma% not a""ear to do so i) onl% dollar )iguresMa% not a""ear to do so i) onl% dollar )igures

e+aminede+amined

Ne!essar% to be "oor to 0uali)% )or "rogramsNe!essar% to be "oor to 0uali)% )or "rograms /isin!entive to earn ot#er in!ome/isin!entive to earn ot#er in!ome

Redistributive "rograms do no sim"l% addRedistributive "rograms do no sim"l% add

amount o) redistributed in!ome to in!omeamount o) redistributed in!ome to in!ome

re!i"ients (ould #ave (it#out "rogramre!i"ients (ould #ave (it#out "rogram

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Ex$ess )urden o "e#ativeEx$ess )urden o "e#ative

In$ome TaxIn$ome Tax Substitution e))e!t !reates negativeSubstitution e))e!t !reates negative

e+!ess burdene+!ess burden

&""lies to an% trans)er "rogram redu!ing&""lies to an% trans)er "rogram redu!ing

bene)its to less need%bene)its to less need%

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In$ome TaxIn$ome Tax

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In$ome TaxIn$ome Tax 1irtues o) Negative In!ome Ta+1irtues o) Negative In!ome Ta+

Sim"le to administerSim"le to administer

Could redu!e total number o) trans)erCould redu!e total number o) trans)er"rograms"rograms

Cas# trans)erCas# trans)er

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Earned In$ome Tax CreditEarned In$ome Tax Credit

*EITC+*EITC+ Closest "rogram to negative in!ome ta+Closest "rogram to negative in!ome ta+

Created in 2345Created in 2345

&mount o) !redit varies&mount o) !redit varies Im"lies 678 marginal ta+ rateIm"lies 678 marginal ta+ rate

Given to ta+"a%er even i) larger t#anGiven to ta+"a%er even i) larger t#an

amount o) ta+es dueamount o) ta+es due

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Tem,orary Aid to "eedyTem,orary Aid to "eedy

-amilies *TA"-+-amilies *TA"-+ Created in 2334Created in 2334

Restri!ts re!i"ients to ma+imum o) 5 %ears o)Restri!ts re!i"ients to ma+imum o) 5 %ears o)

bene)itsbene)its

9el)are rolls #ave de!lined sin!e its in!e"tion9el)are rolls #ave de!lined sin!e its in!e"tion 'unding s#ared bet(een )ederal and state'unding s#ared bet(een )ederal and state

governmentsgovernments

&dministered at state level&dministered at state level Gives assistan!e to transition )rom (el)are toGives assistan!e to transition )rom (el)are to

(or$(or$

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Tem,orary Aid to "eedyTem,orary Aid to "eedy

-amilies *TA"-+-amilies *TA"-+ T&N' re"la!ed &id to 'amilies (it#T&N' re"la!ed &id to 'amilies (it#

/e"endent C#ildren &'/C;/e"endent C#ildren &'/C;

&'/C gave in!entive to remain on (el)are&'/C gave in!entive to remain on (el)are

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or/ or elareor/ or elare

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-ood %tam,s-ood %tam,s

Establis#ed in 23<= to in!reaseEstablis#ed in 23<= to in!rease

agri!ultural demand>"rovide betteragri!ultural demand>"rovide better

nutrition to lo( in!ome )amiliesnutrition to lo( in!ome )amilies

'inan!ed b% )ederal government and'inan!ed b% )ederal government and

administered b% statesadministered b% states

Provides bene)its in $indProvides bene)its in $ind

?78 marginal ta+ rate?78 marginal ta+ rate

Ma% a!t li$e in!ome trans)erMa% a!t li$e in!ome trans)er

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-ood %tam,s Are 'i/ea Cash Transer

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E))e!tsE))e!ts /o not in!rease demand )or agri!ultural/o not in!rease demand )or agri!ultural

"rodu!ts"rodu!ts

Ma% not "rovide better nutritionMa% not "rovide better nutrition

E))e!ts (ould be little di))erent i)E))e!ts (ould be little di))erent i)

re"la!ed b% !as# trans)erre"la!ed b% !as# trans)er

Underground mar$et )or )ood stam"sUnderground mar$et )or )ood stam"s

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%ellin# -ood %tam,s

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Housin# %u&sidiesHousin# %u&sidies

Lo( in!ome #ousingLo( in!ome #ousing

Rent subsidiesRent subsidies

Lo( interest loansLo( interest loans

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Pu&li$ Housin#Pu&li$ Housin#

Government.o(ned a"artment at belo(Government.o(ned a"artment at belo(

mar$et rentmar$et rent

Individual !an !#oose government #ousingIndividual !an !#oose government #ousing

or )orgo subsid%or )orgo subsid%

Unli$el% to "rovide same bene)it level asUnli$el% to "rovide same bene)it level as

!as# trans)er!as# trans)er

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Pu&li$ Housin#Pu&li$ Housin#

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Rent %u&sidiesRent %u&sidies

'ederal government e+"enditure'ederal government e+"enditure

Se!tion @ #ousingSe!tion @ #ousing

'ormula determines subsid% amount ea!#'ormula determines subsid% amount ea!#

re!i"ient eligible )orre!i"ient eligible )or

Creates disin!entive )or earning in!omeCreates disin!entive )or earning in!ome

Can s"end mone% to rent an% 0uali)%ingCan s"end mone% to rent an% 0uali)%ing

a"artmenta"artment

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Rent %u&sidiesRent %u&sidies

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HomelessnessHomelessness

Most visible in maAor !itiesMost visible in maAor !ities

Man% su))er )rom drug>al!o#ol abuse orMan% su))er )rom drug>al!o#ol abuse or

mental illnessmental illness

In urban areas individuals ma% not beIn urban areas individuals ma% not be

able to a))ord minimum level o) #ousingable to a))ord minimum level o) #ousing

Ma$es it di))i!ult to obtain em"lo%mentMa$es it di))i!ult to obtain em"lo%ment

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Possible solutions:Possible solutions: In!ome trans)er "rogramsIn!ome trans)er "rograms

More ine+"ensive #ousingMore ine+"ensive #ousing

Publi! "oli!% #as removed mu!#Publi! "oli!% #as removed mu!#

ine+"ensive #ousing )rom mar$etine+"ensive #ousing )rom mar$et

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