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GOVERNMENT SUBSIDIES AND INCOME SUPPORT FOR THE POOR
C h a p t e r 7
Poverty in the United States
Federal statistics classify the poor as those who live in households having annual income below the established poverty level, which varies with family size and if the head of household is over age 65.
Poverty threshold – level of income below which a household is classified as poor in the U.S.
Average poverty threshold for a family of four in the U.S. in 2008 was $21,834/year.
Poverty in the United States
Poverty in the United States
Eligibility for Assistance
Major welfare programs in the U.S. mainly assist those who cannot work (such as the aged, disabled, and families of needy children headed by women).
Must satisfy the status test for public assistance, ensuring that they belong to a group eligible for poverty relief
Must then pass a means test, establishing that they also have incomes, asset levels below minimally required amounts to be eligible for aid
Entitlement programs require payments to all those meeting eligibility requirements
TANF, SSI, and EITC
Temporary Assistance to Needy Families (TANF) provides family support payments on a temporary and limited basis through grants to state governments, which in turn determine eligibility by income and conditions for receiving welfare payments.
Supplemental Security Income (SSI) is a federally funded and operated program that provides cash transfers to the aged, blind, and disabled who pass a means test.
The Earned Income Tax Credit is a program for families who work and have children that provides assistance in the form of supplements to earnings that are transfers paid out when eligible recipients file federal income tax forms.
In-Kind Benefits
Noncash benefits that increase the quantities of certain goods and services that will be consumed by the recipients
Medicaid provides basic health services to eligible recipients.
The food stamp program provides coupons or electronic benefits transfer (EBT) cards that can be redeemed for food and related items.
Various other programs, such as social services (foster care, child nutrition, etc.), are available.
U.S. Federal Expenditures for Poverty Assistance
Price-Distorting Subsidies
Subsidies that reduce prices to consumers below the market price
Likely to result in losses in efficiency as individuals act to substitute the subsidized good for other goods in their annual budgets
The deadweight loss of a price-distorting subsidy is the extra benefit a recipient can enjoy from the dollar amount of the subsidy if instead the grant was received in a lump sum.
Price-Distorting Subsidies
Excess Burden of a Subsidy
Price-Distorting Subsidy: Medicaid
In general, Medicaid can be viewed as reducing to zero the money price of medical services to most eligible low-income persons.
Marginal social costs of medical services do not increase as more are made available to the poor.
The dollar value of the gain in well-being for recipients of Medicaid is less than the cost of the program to taxpayers.
Price-Distorting Subsidy: Medicaid
Impact of Medicaid on Price
Medicaid and State Government
Absorbing 21% of state budgets in 2008, Medicaid is the largest category of state government expense, above education spending.
Each state establishes its own eligibility standards.
Federal government pays a share, the Federal Medical Assistance Percentage (FMAP).
Public Housing
Some housing subsidies in the U.S. reduce the price of housing only if the poor move into specially constructed, government-supplied housing reserved for low-income families.
Housing rented at rates considerably below those of the market.
Public housing expected to increase recipient’s consumption of housing.
Could actually reduce consumption of housing by restricting the freedom of choice of the consumer
Public Housing
Public Housing
Fixed Allotment Subsidies
Give eligible recipients the right to consume a certain amount of a good or service each month
Do so either through direct allotment of the item or issuance of vouchers for buying only a specific item
The food stamp program is a fixed allotment subsidy.
For most U.S. food stamp recipients, the stamps are equivalent to a cash transfer.
The Food Stamp Program
A case in which the effects of a cash grant and the food stamp grant on consumption are identical:
The Food Stamp Program
A case in which a person is worse off with food stamps than with an equivalent monthly cash grant:
Impact of Assistance on Work Incentive
The more generous the grant from welfare benefits, the greater the disincentive to work.
Further disincentive results from the way benefits are reduced as the recipient earns more income.
New welfare law deals with work disincentives by limiting the period of eligibility for assistance and requiring recipients to work.
However, studies suggest that even if benefits were reduced substantially, work would increase, but not by enough to bring workers out of poverty.
Income Effect of a Transfer
Transfer That Declines with Earned Income
Negative Income Tax (NIT)
All those with income below the floor would receive cash subsidies from the government, whereas those above the floor would pay taxes
First, the income guarantee must be decided upon
Second, rate at which transfer would be phased out as recipients’ earnings increased would be determined
When a family earns enough that the transfer falls to zero, the family begins to pay taxes
Negative Income Tax (NIT)
Negative Income Tax (NIT)
Wage Rate Subsidies (WRS)
Under WRS, minimum wage would be repealed, and those working at the lowest wages would receive subsidies from the government to raise their incomes to some minimum level.
Subsidy would vary with hours worked and would be phased out as hourly wage rate increased.
EITC
Throughout the years, changes in the EITC have increased cash support for the poor and also represent increased federal commitment to support the working poor.
NIT Versus EITC
EITC more favorable to work effort than NIT because it is available only to those who work
EITC more like a wage rate subsidy than NIT
EITC differs from NIT plans in that basic income guarantee is a percent of earnings and increases as earnings increase until the maximum amount is reached.
Combined with other programs, such as food stamps and Medicaid, EITC increases support for the U.S. poor while increasing incentive to work.
EITC 2008
Welfare Reform
Personal Responsibility and Work Opportunity Act of 1996 requires most welfare recipients to work, a fundamental change in the U.S. income support system.
Cash assistance can only be a temporary source of income to most recipients who meet status and means tests.
State governments required to set up plans to help recipients under TANF to develop work skills and find work.
Welfare Reform
TANF provisions to achieve reform objectives:
Means-tested cash transfers are limited to five years to any family over their lifetime.
Each state receives a grant to subsidize child care services to the poor.
TANF includes policies to reduce the number of nonmarital births.
A parent with a child over the age of five who refuses an offer of work approved by social service case workers will lose benefits.
Since the introduction of TANF, U.S. welfare caseloads have declined.
Distribution of U.S. Money Income
Income Distribution: Interpreting the Data
Part of interpretation difficulty stems from fact that data are for households, not individuals.
Over time, number of two-income households has increased.
Increased share of income going to them overstates individual gains relative to low-income households.
Possible that income shares going to the upper fifth can increase when individual incomes do not grow if more upper-income people marry other upper-income people
Would be more useful to look at how earnings vary among people of similar characteristics or distinct groups (e.g. 18- to 24-year-old males with a high school education, retirees)

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