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Income distribution and welfare programs. Absolute deprivation and poverty rates.
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Income distribution-is how a nation`s total GDP is distributed amongst its population. There are two ways of thinking about the distribution of income: relative income inequality and absolute deprivation. Relative income inequality measures the share of nation`s total income that accrues to the poor relative to the rich. Relative income inequality is measured by the difference between the share of incomes accruing to the higher-income groups and the share accruing to lower-income groups. Absolute deprivation is the amount of income the poor have relative to some measure of «minimally acceptable» income or, in the other words, how much the poor have relative to some measure of a reasonable «minimally acceptable» income level. It is the second way to think about income distribution. In the United States the standard for measuring absolute deprivation is the poverty line. Poverty line is the federal government`s standard for measuring absolute deprivation. Concerning poverty line measurement, there can be named the following problems: bundle has changed, differences in cost of living across areas are ignored, income definition is incomplete. An important question for government redistribution policy is whether relative or absolute deprivation is the more appropriate measure for driving redistribution? If the income of the rich doesn`t matter, given an acceptable level of consumption by the poor, then it is not relative income inequality that a nation cares about but rather some measure of absolute deprivation. On the other hand, there are two reasons why relative income inequality measures may matter. First, the «minimal» standard of living for a society may be best defined relative to the standard of living of others. Second, there is some interesting recent evidence that the level of inequality in society is itself negatively related to measures of well-being.
In discussing welfare policy, it is important to understand two characteristics of each policy:
1. Categorical and Means-tested programs: - Categorical Programs-welfare programs restricted by some demographic characteristic, such as single motherhood or disability. -Means-tested Programs-welfare programs restricted only by income and asset levels.
2. Cash and In-Kind Programs: -Cash Welfare-welfare programs that provide cash benefits to recipients (Ex. TANF, SSI)
-In-Kind Welfare-welfare programs that deliver goods, such as medical care of housing, to recipients (Ex. Food Stamps, Medicaid, Public Housing)
1. a
2. c
3. b
4. e
5. A
6. a
7. e
8. B
9. B
10. c
3.1. Public finance on federal, regional (state) and municipal (local) levels. 3.2.
| Level of government | Source of Revenue | Expenditures |
| Federal | Personal income tax, payroll tax for social security, corporate profit tax | National defense, retirement, healthcare |
| State | Personal income tax, sales tax | Highways, education, healthcare |
| Local | Property tax, Sales tax | Education, public safety |
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3.2 a) 
(график справа)
b)social welfare function (SWF) A function that combines the utility functions of all individuals into an overall social utility function.
With a utilitarian social welfare function, society’s goal is to maximize the sum of individual utilities: SWF= U1+ U2+...+Un
The utilities of all individuals are given equal weight, and summed to get total social welfare. This formulation implies that we should transfer from person 1 to person 2 as long as the utility gain to person 1 is greater than the utility loss to person 2. In other words, this implies that society is indifferent between one util (a unit of well-being) for a poor person and one for a rich person.
c) 'Equity-Efficiency Tradeoff'
An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.
d) The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file. EITC reduces the amount of tax you owe and may give you a refund.
VARIANT 21
1.1 Fiscal federalism, financial relations between units of governments in a federal government system. Fiscal federalism is part of broader public finance discipline. The term was introduced by the German-born American economist Richard Musgrave in 1959. Fiscal federalism deals with the division of governmental functions and financial relations among levels of government. The theory of fiscal federalism assumes that a federal system of government can be efficient and effective at solving problems governments face today, such as just distribution of income, efficient and effective allocation of resources, and economic stability. Economic stability and just distribution of income can be done by federal government because of its flexibility in dealing with these problems. Because states and localities are not equal in their income, federal government intervention is needed. Allocation of resources can be done effectively by states and local governments. Musgrave argued that the federal or central government should be responsible for the economic stabilization and income redistribution but the allocation of resources should be the responsibility of state and local governments
Optimal fiscal federalism - the question of which activities should take place at which level of government.
example: USA 
The Tiebout model suggests that the provision of local public goods can be efficient if individu- als “vote with their feet” by moving to towns with others who share their tastes for public goods. The Tiebout model suggests that spending with strong tax-benefit linkages (such as public safety) should occur at the local level and that spending with weaker tax-benefit linkages (such as redistribution under cash welfare) should occur at higher levels of government.
Instruments of intergovernmental finance:
If higher levels of government decide for one of the two reasons stated to redis- tribute across lower levels of government, they do so through intergovernmental grants, which are cash transfers from one level of government to another.
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matching grant - A grant, the amount of which is tied to the amount of spending by the local community.
block grant - A grant of some fixed amount with no mandate on how it is to be spent. conditional block grant - A grant of some fixed amount with a mandate that the money be spent in a particular way.
1.2 Crowd - out means that as the government provides more of a public good, the private sector will provide less. There are a large number of studies that consider how private spending on public goods responds to public spending on the same public goods. Crowd-out is a classic example of the unintended consequences of government action The government intended to do the right thing by increasing fireworks to the social optimum. But, in fact, it ended up having no effect because its actions were totally offset by changes in individual actions. Full crowd-out is rare. Partial crowd-out is much more common and can occur in two different cases: when noncontributors to the public good are taxed to finance provision of the good, and when individuals derive utility from their own contribution as well as from the total amount of public good.
One solution to the crowd-out problem is the use of educational vouchers.Educational vouchers – is a fixed amount of money given by the government to families with school-age children, who can spend it at any type of school, public or private. The Voucher has the same effect as a conditional lump-sum grant to local governments: it raises incomes but forces the families to spend a minimum amount on education. Vouchers might solve this crowd-out problem by allowing people to choose the optimal level of education for themselves, as well as interjecting competition into the education market.
Many of the arguments in favor of public financing of education relate to the externalities that come from having a common educational program, particularly at the elementary school level. The first argument made here for vouchers, that schools will tailor themselves to meet individual tastes, threatens to undercut the benefits of a common program. So, Vouchers May Lead to Excessive School Specialization.
Critics envision a world where children of motivated parents move to higher-quality private schools, while children of disinterested or uninformed parents end up in lowquality public schools. If the children of interested and motivated parents differ along the lines of race, income, or child ability from those of uninterested and unmotivated parents, segregation could worsen.
Vouchers also might increase segregation by student skill level or motivation. As the motivated and high-skilled students flee poor-quality public schools for higher-quality private schools, the students left behind will be in groups that are of lower motivation and skill.
1.3 Individuals can receive their PIA starting at age 66 and 4 months, which is the Full Benefits Age (FBA). As a result of 1983 legislation (discussed in more detail later in this chapter), the FBA is currently slated to rise to age 67 for those born in 1960 or later.12 It is possible to receive benefits as early as age 62, which is the Early Entitlement Age (EEA). For each year of benefits claimed before age 65, however, there is an actuarial reduction in benefits of 6.67% per year (for the 3 years before the FBA) or 5% per year (for earlier months). Individuals who claim their benefits at age 62 today receive about 27% less in benefits than those who claim benefits at age 65. This is called an “actuarial” reduction because it is designed to compensate for the fact that individuals who take benefits early receive them for more years.
Ida May worked for only three years after the establishment of the Social Security system, and paid a total of $24.75 in Social Security taxes. Ida May went on to live for 35 more years, dying at age 100 in 1975. Over those 35 years, she collected a total of $22,888.92 in Social Security benefits. Quite a return on her $24.75 investment! Ida May is a striking example of the first generation of Social Security beneficiaries who were the big winners under this new social program.
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Test
1) B
2) A
3) C
4) D
5) D
6) C
7) B
8)E
9)A
10)A
3.2 a) 
(график справа)
b)social welfare function (SWF) A function that combines the utility functions of all individuals into an overall social utility function.
With a utilitarian social welfare function, society’s goal is to maximize the sum of individual utilities: SWF= U1+ U2+...+Un
The utilities of all individuals are given equal weight, and summed to get total social welfare. This formulation implies that we should transfer from person 1 to person 2 as long as the utility gain to person 1 is greater than the utility loss to person 2. In other words, this implies that society is indifferent between one util (a unit of well-being) for a poor person and one for a rich person.
c) 'Equity-Efficiency Tradeoff'
An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.
d) The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file. EITC reduces the amount of tax you owe and may give you a refund.
VARIANT 22
1.1 Public finance on federal, regional (state) and municipal (local) levels
The public finance of the Russian Federation consists of three levels:
1) - the Federal level
2)- level of subjects of the Russian Federation
3) -the third level - local
As can be seen, the finance device of the Russian Federation is determined by its state structure - unitary States, the budgetary system has two levels: the state budget and local budgets (however, in unitary, and in Federative States the budgets of lower levels (lower state and administrative-territorial units) are not included in the budgets of higher levels).
Each municipality has its own budget and the right to receive in the process of budgetary management of funds from the Federal budget and from the budget of a constituent entity of the Russian Federation. The concept of "local budgets, budgets of municipalities, budgets of local governments" are treated as synonyms.
The budget code of the Russian Federation, which was adopted in 1998, expanded the budget to include the budgets of state extra-budgetary funds.
The budget legislation contains the concept "the consolidated budget" - the code of budgets of all levels of the budget system in corresponding territory (item 6 BK the Russian Federation). The consolidated budget of a constituent entity of the Russian Federation budget of the subject and of the budgets of its municipalities. The consolidated budget of the Russian Federation is the Federal budget and consolidated budgets of the constituent entities of the Russian Federation. Consolidated budgets allow to get a complete picture of all income and expenditure of the region or the Federation as a whole, they are not approved by and are used for analytical and statistical purposes.
2Начало формы
3Конец формы
1.2 How is the government involved in education? Federal education spending, FY 2015
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However, one of the most profound problems arising from the interaction of these two social institutions, is that now the state functions in education are often considered purely in financial or legal way. We will not dwell on well-known truths, mentioning the notorious problem of inadequate funding or unreasonable planning of education. And pay attention to the fact that the appointment of the state in education is significantly above this level, therefore, the range of its functions must be significantly wider. This is evidenced by historical and theoretical analysis of the problem, thereby acknowledging the loss or care of a modern state of their opportunities and responsibilities.
The important role of education in economic and social development of modern society, ensuring the international competitiveness of national economies causes a permanent interest of political, scientific, business and public circles to the problems of state educational policy. The common understanding that "the future belongs to those countries that have the most efficient school, capable of creating intellectual potential as an important objective basis for developing the capabilities of most citizens and to ensure their well-being.
On the other hand, the capacity of the state as a social institution, its legislative performance, organizational-administrative, managerial, logistical and other features make it one of the most powerful social mechanisms for the formulation and implementation of public-practical purposes. And in such a mechanism is in need of modern education system. So now it is clear that there can be strong personality and fully implementing it in a backward country and a weak state. Because "education is determined by the organization of the social system and its socio-political and financial basis, on which depends the appearance in the sphere of education of values such as freedom, equality, social justice.
1.3 The costs and benefits of social insurance to firms
---The Effects of Partial Experience Rating in UI on Layoffs
The key feature of UI from the firm’s perspective is that it is partially experience-rated. A fully experience-rated system would be one in which a firm pays additional tax each time it lays off a worker. The amount collected through the tax would equal the expected UI benefits paid to that worker. In the current UI system, payroll taxes do rise with past layoffs, but much less than one for one.
---Partial Experience Rating Subsidizes Layoffs
Once firms reach the maximum UI tax rate, there is no additional tax cost to them for additional layoffs. This is a general phenomenon in states across the nation: high-layoff firms are subsidized for additional layoffs, relative to a fully experience-rated system. Contrast this with full experience rating. In that case, the benefits paid to the worker would be exactly canceled by the taxes paid by the firm, so that, on net, there would be no money flowing from the government to this worker–firm pair. Thus, if the worker wants a paid vacation, the firm has to pay for it; there is no subsidy to layoffs from the government because the firm pays the full costs of any layoffs.
---The “Benefits” of Partial Experience Rating
Once again, the benefit that offsets this moral hazard cost is consumption smoothing. Having a fully experience-rated system would “hit firms while they are down”: just when firms have laid off the most workers (presumably because the firm is not doing well), their taxes would increase the most. At the same time, by having partial experience rating, UI programs systematically subsidize high-layoff firms. These firms may be particularly inefficient firms that, in a capitalist economy, should go out of business, leaving the field to their more efficient rivals. In particular, the system of partial experience rating subsidizes seasonal firms, which can afford to hire workers for just part of the year because the workers can receive UI for the remainder of the year, at no marginal cost to the firm. Anderson and Meyer (2000) computed that, in Washington State, the one-eighth of firms that are subsidized by the UI system for four continuous years account for one-third of all UI benefits payments.
----Workers’ Compensation and Firms
With UI, partial experience rating means that firms and workers have an incentive to increase layoffs to exploit this government payment for leisure. With WC, firms and workers can get together to increase “injuries” if the insurance is less than fully experience-rated.
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MCQ
1-e 2-b 3-a 4-a 5-b 6-a 7-b 8-e 9-e 10-e
3.1.Explain the Crowd -Out Problem in Education. How would this "solve" with the Educational Vouchers? How vouchers will lead to excessive school specialization or to Segregation?
Crowd-out problem: As the government provides more of a public good, the private sector will provide less.
Education is a public good that is provided to some extent by the private sector. As such, an important problem with the system of public education provision is that it may crowd out private education provision. Indeed, it is possible that providing a fixed amount of public education can actually lower educational attainment in society through inducing choice of lower quality public schools over higher-quality private schools
Vouchers might increase segregation by student skill level or motivation. As the motivated and high-skilled students flee poor-quality public schools for higher-quality private schools, the students left behind will
be in groups that are of lower motivation and skill. That is, school choice is likely to reduce segregation along some dimensions but increase it along others.
Vouchers might solve this crowd-out problem by allowing people to choose the optimal level of education for themselves, as well as interjecting competition into the education market.
At the same time, vouchers may lead to increased educational stratification, and the education market may face difficulties in implementing competition.
Existing evidence suggests that private school choice through vouchers can move students to better schools, but a much richer evaluation of the total social effects of vouchers is needed before policy conclusions can be drawn.
In Russia Spending on education will go down from 649.8 billion roubles to 618.9 billion roubles in 2015-2017
3.2 Suppose the federal government is considering raising the minimum wage to $10 per hour. An economist testifies to Congress that this plan is inefficient and causes deadweight loss.
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a)Show graphically the deadweight loss caused by the minimum wage law.
b)Suppose that you are a member of Congress and you believe in the utilitarian social welfare function. How would you determine whether to vote for or against the policy?
The Rawlsian social welfare function is consistent with redistribution from the rich to the poor whenever utility is increasing in wealth (or income). The utilitarian social welfare function can also be consistent with a government that redistributes from the rich to the poor, for example, if utility depends only on wealth and exhibits diminishing marginal utility. However, the Rawlsian social welfare function weights the least-well-off more heavily, so it will generally prescribe more redistribution than the utilitarian social welfare function. If utility depends only on wealth and exhibits diminishing marginal utility, and if effi- ciency losses from redistribution are small, then both the utilitarian and Rawlsian social welfare functions can be consistent with government redistribution. A simple example can illustrate this point. Suppose that utility as a function of wealth is expressed as v = √w, and that a rich person has wealth of $100 (yielding utility of 10) and a poor person has wealth of $25 (yielding utility of 5). The sum of utilities is 10 + 5 = 15.
Tax the wealthy person $19; their remaining wealth is $81, yielding utility of 9. Give $12 of the $19 to the poor person; this yields wealth of 25 + 12 = $37. The square root (utility) of 37 is greater than 6, so total utility is now greater than 15, even with the effi- ciency loss of $7 ($19 – $12). Under the Rawlsian function, which considers only the least-well-off person’s utility, social welfare has increased from 5 to greater than 6.
c)Explain why this policy choice demonstrates a trade-off between equity and efficiency
Efficiency is not the only goal of government policy. Equity concerns induce govern- ment to intervene to help people living in poverty, even when there are efficiency losses. In economic terms, a society that willingly redistributes resources has determined that it is will- ing to pay for or give up some efficiency in exchange for the benefit of living in a society that cares for those who have fewer resources. Social welfare functions that reflect this willingness to pay for equity or preference for equity may be maximized when the government intervenes to redistribute resources.
d)Explain the Earned Income Tax Credit. Explain why the EITC may provide equity with small losses in efficiency.
The United States federal earned income tax credit or earned income credit (EITC or EIC) is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children.
The EITC increases wages for some, increasing their return to working and thus increas- ing the cost of leisure; not only do these workers earn a wage, but they receive a bonus, in the form of the EITC, on top of that wage. Because the EITC is available only as a subsidy for earned income, it specifically rewards work effort, thus tending to increase it for those who qualify for the benefit. Offsetting this effect is an income effect that tends to reduce work effort. The EITC programs increases the total income of any worker with positive earn- ings less than $33,700. This increase in income will tend to lead them to enjoy more leisure time—to reduce their labor supply. A similar effect is possible for workers who would earn slightly more than $33,700 in the absence of the EITC. These workers may choose to work slightly less when the EITC is put in place so that they can qualify for some EITC benefits and enjoy more leisure. An increase in the EITC compensation rate is likely to increase labor supply. In prin- ciple, there are offsetting substitution and income effects. The higher compensation rate makes leisure relatively more expensive for workers, so the substitution effect leads work- ers to supply more labor. Offsetting this, the higher compensation rate makes workers richer, leading them to consume more leisure and supply less labor. Since the EITC ap- plies only to low-income workers, however, the substitution effect is likely to dominate. In particular, some workers might not choose to work at all with the 30% compensation rate. They would face only the substitution effect, and it might be strong enough to induce some of them to enter the labor force. The low- income individual finds himself or herself in the phase-out portion of the EITC and is sub- jected to a high effective marginal tax rate.
VARIANT 23
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