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 persons 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