Text III. Government Antipoverty Policies

Why are economists and others concerned with income inequality and poverty? One reason might be normative. People might have compassion for those who have less than they do, or people might not like to see the squalid living conditions endured by some in poverty. In other words, the existence of poverty may mean lower levels of utility for members of society not in poverty. If increases in poverty mean decreases in utility, then people will want less poverty. They will be willing and able to purchase less poverty by allocating portions of their income or their time to alleviating the problem. Another reason for concern about income inequality and poverty might be positive, or not dependent on value judgments. Perhaps the inequality is a result of inefficiency, and a correction of the situation that creates the inefficiency will improve the functioning of the economy. For instance, if education provides benefits for societies that are not taken into account in individual decisions to acquire education, then too few people acquire education. People who would have acquired education if the positive benefits for society had been subsidized, but did not, are wasted resources. These people would have earned more income; fewer would have fallen into poverty; and the distribution of income might have been more equal. In this sense, the number of people in poverty and the existence of income inequality provide indications that allocative efficiency has failed to occur. The government is often called on to resolve market failures. If poverty is distasteful to society, then citizens, by paying taxes and through their votes, may ask the government to reduce poverty. Whatever the rationale, positive or normative, the fact is that the government is involved in antipoverty programs and in the attempt to reduce income inequality. Having accepted this fact, several questions arise. For instance, is the government carrying out its antipoverty programs efficiently? What are the ramifications of the government programs? Have the programs reduced poverty?

One approach to reducing poverty is to provide people with enough income to bring them above the poverty level. Funds used to supplement the incomes of the poor must come from somewhere. Many societies adopt a Robin Hood approach, taxing the rich to give to the poor. Income taxes can influence income distribution through their impact on after-tax income. Taxes may be progressive, proportional, or regressive.

A progressive income tax is a tax that rises as income rises—the marginal tax rate increases as income increases. If someone with an annual income of $20,000 pays $5,000 in taxes while someone else with an annual income of $40,000 pays $12,000 in taxes, the tax rate is progressive. The first person is paying a 25 percent rate, and the second is paying a 30 percent rate.

A proportional tax is a tax whose rate does not change as the tax base changes. The rate of a proportional income tax remains the same at every level of income. If the tax rate is 20 percent, then individuals who earn $10,000 or $100,000 pay 20 percent.

A regressive lax is a tax whose rate decreases as the tax base changes. The social security tax is regressive; a specified rate is paid on income up to a specified level. On income beyond that level, no social security taxes are paid. In 2005 the cutoff level of income was $68,400 and the tax rate was 7.65 percent. A person earning $300,000 paid no more social security taxes than someone earning $60,000. A progressive tax rate tends to reduce income inequality; a proportional tax does not affect income distribution; and a regressive tax increases inequality. The progressive tax takes larger percentages of income from high-income members of society than it takes from low-income members. This tends to equalize after-tax incomes. In the United States, the federal income tax is progressive. The tax rate rises from zero to 36 percent as income rises (39 percent for incomes above $1 million). The main transfer programs are social insurance, cash welfare or public assistance, in-kind transfers, and employment programs. Social security— officially known as Old Age, Survivors, and Disability Insurance (OASD1) and listed as FICA on your paycheck stubs—is the largest social insurance program. It helps a family replace income that is lost when a worker retires in old age, becomes severely disabled, or dies. Coverage is nearly universal, so the total amount of money involved is immense—nearly $200 billion annually. Two-thirds of the aged rely on social security for more than half of their income.

Unemployment insurance provides temporary benefits to regularly employed people who become temporarily unemployed. Funded by a national tax on payrolls levied on firms with eight or more workers, the system is run by state governments. Benefits normally amount to about 50 percent of a worker's usual wage.

Aid to Families with Dependent Children (AFDC) is the second largest cash welfare program. The average AFDC family is headed by a mother with two small children and receives about $400 per month. In 2005 the federal government required each state to develop its own welfare program. Most began limiting the amount of time a family could receive AFDC or other welfare payments.

Supplemental Security Income (SSI) ranks first among cash welfare programs. Fully 65 percent of the SSI population is blind or otherwise disabled. The rest are over age 65. Unlike social security recipients, who are entitled to receive benefits because they are a certain age or otherwise qualify, recipients of SSI must meet certain disability requirements or be of a certain age and must have incomes below about $4,500 per year. About 60 percent of all poor households receive in-kind transfers. The largest of these programs is Medicaid. Medicaid provides federal funds to states to help them cover the costs of long-term medical and nursing home care. Second in magnitude is the food stamp program, which gives households coupons that are redeemable at grocery stores. The amounts vary with income and household size. Other programs include jobs and training directed toward disadvaniaged workers and the Head Start program, an education program available to poor children. Total government outlays for social service (welfare) programs run more than $700 billion annually. In fact, there is disagreement about whether antipoverty programs have reduced or increased poverty. Some people maintain that without the programs, income inequality and poverty would have been much more severe. Others argue that welfare has been a drag on the economy and may have made poverty and inequality worse than they otherwise would have been. It is impossible to compare what did happen with what would have happened in the absence of the government's programs. Incentives for both the rich and the poor to work hard and. increase their productivity may be reduced by programs that take from the rich and 'give to the poor. Those paying taxes may ask themselves, "Why should I work an extra hour every day if all the extra income does is pay additional taxes?" Someone who gets to keep only 60 cents out of the next dollar earned has less incentive to earn that dollar than if he or she got to keep it all. Those who receive benefits may lose the incentive to change their status. Why should someone take a job paying $6,000 per year when he or she can remain unemployed and receive $8,000? Someone out of work might wonder, "Why should I spend eight hours a day in miserable working conditions when I can relax every day and bring home nearly the same amount of income?" If incentives to work are weak, then the total income created in the economy is less than it otherwise would be. Less income and lower economic growth mean more people in poverty. Some have argued that the welfare system causes welfare dependency—that children who grow up on welfare are likely to become welfare recipients as adults and to have children who eventually become dependent on welfare. Evidence that such a situation occurs is not strong, but the incentives for it to occur do exist. Society tries to provide families with decent living standards hut does not want transfers to go to those who do not need them. As a result, transfer programs are designed to provide the greatest benefits to the people with the lowest incomes. As incomes rise, benefits decrease.

The solution to the welfare system problems most often proposed by economists is the negative income tax (NIT)—a tax system that transfers increasing amounts of income to households earning incomes below some specified level. The lower the income, the more that is transferred. As income rises above the specified level, a tax is applied. Economists like the NIT because, at least in theory, it attacks the distribution of income and reduces poverty without reducing efficiency.

The top 20 percent of household income earners in the United States earn 44.6 percent of total household income while the bottom 20 percent earn just 4.6 percent. The government provides assistance to the lowest rungs of income recipients through food stamps, Aid to Families with Dependent Children, Medicare, Medicaid and public housing. In urban areas, public housing known as the projects are multistory and public housing. In urban areas, public housing known as the projects are multistory buildings housing hundreds of families. In rural areas, government-provided housing often takes the form of wide trailers located on the outskirts of small towns. '

For people now covered by welfare programs, the negative income tax would increase the incentive to work, and that is what proponents of the negative income tax like. However, for people who are too well off to receive welfare but would become eligible for NIT payments, the negative income tax might create work disincentives. It provides these families with more income, and they may choose to buy more leisure.

Exercises

I. Learn the vocabulary:

Compassion, squalid living conditions, to he endured by smb., to alleviate the problem, the ramifications of the government programs, paycheck stubs, magnitude, incentive for smth., outskirts of small towns, to become eligible for smth.

II. Explain the meaning of the following words and word combinations:

A progressive income tax, a proportional tax, a regressive tax, welfare dependency, a negative income tax.

III. Say whether you agree or disagree with the following statement. Use

introductory phrases for agreement and disagreement,

Agreement: Yes, I agree with it. /Absolutely/It's obvious /Exactly,

Disagreement: I'm afraid I can't agree. / I'm sorry, but that's not quite right. / To my mind it's wrong.

1) Tax policies can affect the distribution of income.

2) The federal income tax in the United States is slightly progressive.

3) Spending programs used by the government to fight poverty include social

insurance, cash welfare, in-kind transfers, and employment programs.

4) Welfare systems may reduce incentives to work and thereby harm the economy

and cause more poverty.

5) The lower the income, the less the benefit received by the family.

6) The negative income tax can reduce poverty without reducing efficiency.

IV. Answer the following questions:

1) How does the government try to reduce poverty?

2) Why doesn't the private market resolve the problem of income inequality

and poverty?

3) How could transfer programs (welfare programs) actually increase the

number of people in poverty?

4) Why do economists like the negative income tax?

5) What are the main forms of the government assistance to the lowest income

recipients in urban and rural areas in the USA?

6) What do you think the advantages and disadvantages of welfare programs?

V. Discuss the peculiarities of government antipoverty policies in America and in Russia.

VI. Read and render the text.

Date: 2016-01-03; view: 714