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CHAPTER 34 -- Part 1: TRANSFER PAYMENTS: WELFARE
You should know LO1 after reading this chapter.
Labor supply and total output are affected by transfer programs.
Americans are compassionate.
The risk of giving a free ride is that some people will reveal that an overwhelming majority of the public could have gotten by without it.
Dave Barry observed that most Americans would be willing to pay more taxes if the government offered $1 million to help the poor.
Taxpayers don't or don't claim to have one.
Income transfers can make people want to be ripped off.
They encourage people to change their behavior in order to help the needy, not being wasted by deadbeats.
Welfare programs for the poor are affected by the conflict between compassion and resentment, as well as Social Secu tives and behavior.
Roughly 50 cents out of every federal tax dollar is devoted to income transfers.
Almost every household gets some of the transfer money.
There are many federal income transfer programs.
Students can get tuition grants.
Crop assistance is given to farmers.
Disaster relief is given to homeowners when their homes are destroyed.
Benefits and subsidized health care are available to veterans.
Social Security and subsidized health care are available to people over the age of 65.
Welfare checks, food stamps, and subsidized housing are given to poor people.
Income transfers are widely distributed, but not everyone gets the same bounty.
Only three of the transfer programs account for 85% of the total outlays.
Another 44 percent is absorbed by Medicare and Medicaid.
Welfare checks only account for 4% of income transfers.
Income transfer can include cash payments.
The 58 million people who get Medicaid are the same.
The provision of in-kind benefits is intended to promote specific objectives.
Few taxpayers object to feeding the hungry.
To minimize that risk, taxpay fers that involve direct cash payments to recipients, for exam ers offer electronic food stamps, not cash, thereby limiting the recipient's consumption.
Taxpayers can be reassured that their assistance is well spent.
There are over 100 federal income transfer programs.
5 percent of income transfers are absorbed by cash welfare benefits.
The Medicare program has similar considerations.
The $450 billion spent on Medicare could be "cashed out" by taxpayers.
Some older Americans would get cash they didn't need.
They could spend their new-found income on something else.
The result would be a smaller health care gain.
In-kind medical transfers are more efficient than cash age of income transfers because recipients would use equivalent cash transfers for other purposes.
The food was intended for the intended recipients.
The recipients would spend less on food if they received cash instead of food stamps.
Not all income transfers go to the poor.
They only go to families with little or no assets.
Welfare programs always have an income eligibility test.
To be eligible for welfare payments, a family must prove that it can't survive on its own.
To get food stamps, a family must also have at least one gram of welfare and food stamps.
You can get Social Security or Medicare if you're old enough.
Everyone who is 65 years old gets Medicare benefits.
They cover the costs of specific problems, such as old age, illness, disability, unemployment, and Social Security problems.
Some people get too much and others get too little when the market slices up the pie.
We want the government to play Robin Hood to fix the inequity.
Transfer programs change the distribution of income.
$600 billion a year is redistributed from workers to retirees by Social Security alone.
40 percent of the income older people receive comes from Social Security checks.
Half of the elderly population would be poor without those checks.
Income transfers reduce U.S. inequality by at least 20 percent.
Income transfers change the mix of output.
The goal of food stamps is to increase food consumption by the poor.
The strategy is not to remove food from rich people's plates.
The mix of output is affected by housing subsidies and free health care.
Student loans change the mix of output in favor of educational services if more students go to college.
Market behavior and outcomes can be changed by income transfers.
Work incentives may be dulled by the provision of transfer payments.
The pie shrinks when we try to slice it.
A reduction in labor supply is one of the consequences of income transfer programs.
Welfare benefits give a small incentive to women to have more children.
People are encouraged to over use health care services by Medicare and Medicaid.
Unemployment benefits help workers stay out of work.
Dave Berry noted at the beginning of the chapter that disability payments encourage people to grow a sixth toe.
The existence of the unwanted incentives is clear.
Let's look at how welfare programs operate to understand how income transfer programs change market behavior.
There are federal welfare programs called Temporary Aid to Needy Families.
The TANF program was created after the welfare reforms of 1996 and replaced an earlier program that had been reform since 1935.
States can use their own tax revenues to supplement their TANF block grants.
The dilemma of how to help the poor without encouraging market behavior is faced by all such programs.
Potential recipients are the first task of the TANF program.
The federal government has established a poverty line that shows how much cash income families of different sizes need to buy basic necessities.
A family of four with an income of less than $20,600 was considered poor in 2006 by the federal government.
The table shows how the poverty threshold varies by family size.
A four-person family with $18,000 of income in 2006 would have been considered poor.
There was a shortfall in income and a poverty threshold.
The government deems a "minimally adequate" poverty threshold to be between actual income and additional income.
The proposition creates some problems.
All families would have enough income to reach their poverty line.
Poor people would get enough welfare to escape poverty.
No one would be poor.
There are two potential problems with this policy.
Current statistics on poverty show that the decision to work is a response to both the financial and available from the U.S. Census.
The bureau is at www.census.gov/hhes.
The work behavior of people who were poor was affected by the second potential problem.
We assumed that the Jones family was making enough money to get a welfare check.
Will the welfare check change their work behavior?
Poverty thresholds can be different with family size.
A family of four was considered poor in 2006 by the U.S. Department of Commerce.
An extra $1,000 a year can be earned by the family if they work overtime.
How welfare benefits were computed is the reason for the failure of income to rise with wages.
Welfare benefits are reduced by the same amount if they are equal to the poverty gap.
Uncle Sam is not raising the family's taxes.
The end result is the same if you reduce dollar benefits for dollar.
A family can't improve its income by working more if it has a 100 percent marginal tax rate.
Welfare benefits increase the same amount as wages decline.
There is a conflict between compassion and work incentives.
The temptation is to not support yourself by working.
Congress and the states changed the way benefits are calculated to reduce the moral hazard.
They set a lower ceiling on welfare benefits.
States don't offer to close the poverty gap because they set a maximum benefit far below the poverty line.
A family of four can get a maximum benefit of $8,000 in the typical state.
A family with no other income couldn't get enough welfare money to stay out of poverty.
The risk of climbing on the welfare wagon for a free ride is reduced by the lower benefit ceiling.
Welfare departments made another change to the benefit formula in order to encourage welfare recipients to lift their own incomes above the poverty line.
The financial incentive to work was destroyed by the dollar-fordollar benefit cuts.
The marginal tax rate was reduced to give people more incentive to work.
A lower marginal tax rate affects the relationship of total income to wages.
The black line shows the total wages Mrs. Jones could make.
If welfare benefits are reduced dollar for dollar as wages increase, the implied marginal tax rate is 100 per ages at $8/hour cent.
There isn't any incentive to work in this range.
When a 100 percent marginal tax rate is imposed, the blue lines show what happens to her welfare benefits and total income.
If Mrs. Jones goes to work, what will happen to the family's total income?
By working 1,000 hours a year, Mrs.
Jones replaced her welfare check with a paycheck.
Mrs. Jones will wonder why she bothered to go to work.
With a 100 percent tax rate, her total income doesn't rise above $8,000 until she works more than 1,000 hours.
The green lines show how work incentives improve with a lower tax rate.
Welfare benefits are reduced by 67 cents for every dollar of wages earned.
As soon as Mrs. Jones goes to work, her total income increases.
$8,000 if you work 1,000 hours per year.
The top marginal tax rate on federal income taxes is 35 percent, but they still face a higher marginal tax rate.
Welfare costs would be increased by a reduction in the marginal tax rate.
We could eliminate the marginal tax rate.
That would increase their income by $16,000.
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