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CHAPTER
19
Government Redistribution
Programs
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-2
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
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-3
Cash Payments and Utility
Maximization
Payment in Kind
vs.
Cash Transfer
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-4
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
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-5
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-6
Negative Income Tax
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-7
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-8
Incentive to Substitute Into
Leisure
A Reduction in
Income with a
Negative Income
Tax
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-9
Redistribution and Income of
the Poor

Redistribution increases well-being of recipients


Necessary to be poor to qualify for programs


May not appear to do so if only dollar figures
examined
Disincentive to earn other income
Redistributive programs do no simply add
amount of redistributed income to income
recipients would have without program
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-10
Excess Burden of Negative
Income Tax
Substitution effect creates negative
excess burden
 Applies to any transfer program reducing
benefits to less needy

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-11
Excess Burden of Negative
Income Tax
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-12
Excess Burden of Negative
Income Tax
Virtues of Negative Income Tax
 Simple to administer
 Could reduce total number of transfer
programs
 Cash transfer

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-13
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-14
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
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-15
Temporary Aid to Needy
Families (TANF)
TANF replaced Aid to Families with
Dependent Children (AFDC)
 AFDC gave incentive to remain on welfare

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-16
Work or Welfare
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-17
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-18
Food Stamps
Food Stamps Are Like
a Cash Transfer
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-19
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-20
Food Stamps
Selling Food Stamps
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-21
Housing Subsidies
Low income housing
 Rent subsidies
 Low interest loans

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-22
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 SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-23
Public Housing
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-24
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
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-25
Rent Subsidies
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-26
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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-27
Homelessness
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-28
Homelessness

Possible solutions:
 Income
transfer programs
 More inexpensive housing

Public policy has removed much
inexpensive housing from market
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
19-29