A good understanding of labor supply reactions to tax and transfer policies is necessary for achieving related policy goals. Income support programs intend to alleviate poverty and create a more equitable society. However, the reaction of the labor supply can derail the intended results and need to be carefully evaluated for effective policy. Economic theory suggests that as taxes and transfer payments increase, the amount of hours and/or number of employees will decrease (Borjas 2005). The exception is transfer payments with work requirements, where the labor supply moves in the same direction as benefits. In the labor market, individuals have two basic choices: how many hours to work (intensive), and whether or not to work at all (extensive). If the labor supply has largely intensive reactions, certain types of programs, such as food stamps, are most effective, when EITC type programs are more effective for extensive reactions. Government tax and transfer policies affect the labor supply because when the real wage changes the labor supply reacts. This paper will look at the response of the U.S. labor supply to changes in taxes and transfer payments. It will determine if the response is concentrated towards intensive or extensive margins and observe the direction and magnitude of the changes. Understanding labor supply responses is crucial for governments desiring to reach intended policy goals.
Labor market behavior can have significant long run effects on potential output. According to the Congressional Budget Office, the size and quality of the labor force, capital stock, and the efficiency of production, determine a country’s potential output. When policies influence relevant factors, such as the size of the labor force, the...
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...e to participate at a paid wage lower than they would typically require. More people working expands the tax base while reducing the amount of transferred income. The government is able to collect more revenue and still provide a guaranteed income level. (Dickert et al.1995; Browning 1995). EITC type programs can help the government achieve its objectives with minimal negative effects to the economy.
Not all labor markets have identical sizes or types of responses to government decisions. The direction and magnitude of each response will inform policy makers about optimal decisions. Section II of this paper reviews the empirical literature on tax and transfer policies and the labor market. Section III discusses the methodology. Section IV summarizes the results of this study. Section V presents the conclusion as well as identifies areas for further research.
A key to victory this November is the unemployment rate. According to a Bloomberg National Poll conducted in March 8-11, 42% of Americans consider unemployment and jobs as “the most important issue facing the country right now” (Priorities). Although there has been 24 consecutive months of private sector employment growth, the Federal Reserve suggests that the numbers could fade in the coming months. The importance of creating more jobs cannot be stressed enough. No President in the recent era has been reelected with the unemployment rate above 7.2% (Roth). To paint a picture, in late 1982, the unemployment rate topped 10.8 under Ronald Reagan. However, about 36 months later, the rate dropped to 7.2% percent. The drastic drop in the n...
There have been numerous debates within the last decade over what needs to be done about welfare and what is the best welfare reform plan. In the mid-1990s the TANF, Temporary Assistance for Needy Families, Act was proposed under the Clinton administration. This plan was not received well since it had put a five year lifetime limit on receiving welfare and did not supply the necessary accommodations to help people in poverty follow this guideline. Under the impression that people could easily have found a job and worked their way out of poverty in five years, the plan was passed in 1996 and people in poverty were immediately forced to start looking for jobs. When the TANF Act was up for renewal earlier this year, the Bush administration carefully looked at what the TANF Act had done for the poverty stricken. Bush realized that, in his opinion, the plan had been successful and should stay in effect with some minor tweaking. Bush proposed a similar plan which kept the five year welfare restriction in place but did raise the budgeted amount of money to be placed towards childcare and food stamps. Both the TANF Act and Bush's revised bill have caused a huge controversy between liberal and conservative activists. The liberals feel that it is cruel to put people in a situation where they can no longer receive help from the government since so many people can not simply go out and get a job and work their way out of poverty. They feel if finding a job was that easy, most people would have already worked their way out of poverty. The conservatives feel that the plans, such as the TANF Act, are a surefire way to lower poverty levels and unemployment rates as well as decrease the amount o...
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The Earned Income Tax Credit (EITC) is a program that was set in place, in 1975, to improve “the economic status of low-income persons […] granting nearly $40 billion to low-income households” (Borjas, 59). As is clear from the name of the program, The EITC is a program that provides tax credits to those who qualify, the EITC could even produce a negative tax liability for some households, in particular the type I will discuss, which would provide substantial income increases for these households. In order to qualify for the EITC, the recipients must be active members of the labor force, in that they must have labor income, and for the group that I will be focusing on, single mothers, total household income must be below $33,241 for single parents with one child and $37,783 for single parents with two or more children. According to Economist Hillary Hoynes, in a presentation given to the Chicago Federal Reserve Board in 2007, the maximum available credit for a single parent with 1 child was $2,853, with the maximum available credit for single parents with two or more children being $4,716. (Hoynes, 2007) The EITC has provided assistance to countless American families while still providing them with an incentive to remain in the labor force, unlike many other welfare programs. I will focus on a certain subset of people receiving the Earned Income Tax Credit: single-mothers.
Weil & K. Feingold (Eds.), Welfare Reform; The Next Act (pp. 17-20). Washington, DC : The Urban Institute Press.
Welfare recipients are now expected to get a job within the first two years of receiving assistance. It is unclear what will happen when people are forced off of public assistance. In 1998 there was a 3% decline in the poverty level, yet a 35% decline in the number of people receiving public assistance. (Morales, Sheafor, 2000). It is clear that ending AFDC did not solve the problem of poverty in the United States.
From 1990 to the present, government welfare such as income assistance and food stamps have aided the unemployed, the ill, and the broken families of America, but government assistance greatly affects the myth that hard work is the only pathway to success, and welfare provides many negative, as well as positive impacts to society. In the United States, many different welfare systems offer a wide range of benefits including money and food stamps to a variety of people. Plagued with economic issues and a shrinking middle class, the poorest Americans keep getting poorer, and the door seems to be shutting more and more on the opportunity to rise above their impoverished roots. Welfare aims to provide aid to those poor Americans who need an extra boost to keep up and help them in achieving the sought after “American Dream.” According to the US Committee of the Budget: House of Representatives, “There are at least 92 federal programs designed to help lower-income Americans. For instance, there are dozens of education and job-training programs, 17 different food-aid programs, and over 20 housing programs. The federal government spent $799 billion on these programs in fiscal year 2012”. Welfare also greatly affects a large number of the United States’ population, and as Robert Rector states in the article “Spiraling State of Welfare Spending,” “Roughly 100 million people- one-third of the United States population- received at least one means-tested welfare program each month (Feulner). Temporary Assistance for Needy Families (TANF) provides cash assistance for families with children in need. TANF was created after the Personal Responsibility and Work Opportunity Act, which was instituted in 1996 under President Bill Clinton. PRWORA aimed ...
...el). The second option is the guaranteed basic income program. Basic income program is a program where the government provides its citizens with income, regardless of whether they work. Finally, households with children could benefit by increasing the child tax credit program. This strategy will directly help low-income families with kids and will not affect business owners who forced to pay higher minimum wages to their workers (Mathews, Rose).
From the years 2008 to 2013, the United States Federal Government spent over 3.7 trillion dollars on welfare programs (The New Normal: Welfare is Now America’s Most Popular Occupation, Husley). These government assistance programs have come to be abused by many Americans, and this is a problem that needs to be stopped. If the American welfare system can be reformed, it will reduce the strain it is putting on the United States’ already fragile financial system. In order to help the country out of debt and many Americans out of poverty, the American welfare programs must develop more vigorous requirements for citizens to qualify for benefits in addition to reducing the time period of assistance considerably. These changes would exclude citizens who receive disability benefits. This was attempted in 1996 when President Bill Clinton introduced TANF, (Temporary Assistance for Needy Families), as a government program which provided aid to destitute families for a period of five years. During this time, at least one dependent had to find another source of income to maintain their benefits. This reform worked for a time, but the Obama Administration waived the requirement that stated one dependent had to get a job, and allowed individual states to set the mandate (Counterpoint: Welfare Programs Create a Sense of Entitlement, 2013). A better solution would be to limit time of assistance to 18 months and require dependents to have either one full time job or two part time jobs to maintain benefits, unchangeable by the states. All states should lower the benefit pay per month to just below minimum wage so people wouldn’t see welfare as a better way to get support themselves than obtaining a job. This along with other changes to t...
The prospect of the welfare state in America appears to be bleak and almost useless for many citizens who live below the poverty line. Katz’s description of the welfare state as a system that is “partly public, partly private, partly mixed; incomplete and still not universal; defeating its own objectives” whereas has demonstrates how it has become this way by outlining the history of the welfare state which is shown that it has been produced in layers. The recent outcomes that Katz writes about is the Clinton reform in 1996 where benefits are limited to a period of two years and no one is allowed to collect for more than five years in their lifetime unless they are exempted. A person may only receive an exemption on the grounds of hardship in which states are limited to granting a maximum of 20% of the recipient population. The logic behind this drastic measure was to ensure that recipients would not become dependent upon relief and would encourage them to seek out any form of employment as quickly as possible. State officials have laid claim to this innovation as a strategy that would “save millions of children from poverty.” However, state officials predict otherwise such as an increase in homelessness, a flooding of low-waged workers in the labour market, and decreased purchasing power which means less income from tax collections. The outcomes of this reform appear to be bleak for many Americans who reside below the poverty line. How does a wealthy country like America have such weak welfare system? Drawing upon Katz, I argue that the development of the semi-welfare state is a result of the state taking measures to ensure that the people do not perceive relief as a right and to avoid exploiting the shortfalls of capitalism ...
Recently Roosevelt’s Social Welfare Program has become a topic of heated debate. Welfare has come a long way since Roosevelt, it was once a system that help those in need until they could get back on their feet, now welfare has turned into a system that feeds money to a group of people that have become to lazy to find work. Talk of replacing the old system with a welfare program that will emphasize putting welfare recipients to work has become very frequent. More and more stated are now beginning to adopt a “welfare-to-work” program, leaving other states to simply ponder about the idea of “taking people off the system.” Those in favor of welfare reform argue that a welfare-to-work program will cut the amount of people on welfare causing a surplus of funds. These people base their idea on the overwhelming success of those states who have already adopted such a program. Nationwide, welfare caseloads have declined significantly since the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. In the few months since the bill went into effect the amount of welfare caseloads are down by approximately 2 million. Figures also show that Alabama reduced its welfare enrollment by 48%, and Indiana, Oklahoma, South Carolina, and Tennessee reduced theirs by 49%. In Wisconsin welfare was reduced by 58% and Wyoming’s cases dropped an amazing 73% (Source: Dept.
Moffitt, Robert. "Incentive effects of the US welfare system: A review." Journal of Economic Literature 30.1 (1992): 1-61.