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358 ❖ Chapter 20/Income Distribution and Poverty
3. Critics of the minimum wage also point out that many teenagers earning the minimum wage
are from middle-class families, so that a high minimum wage does a bad job of targeting the
poor.
B. Welfare
1. Definition of welfare: government programs that supplement the incomes of the
needy.
2. Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI)
are two welfare programs.
3. A common criticism of these programs is that they create incentives for people to become
needy.
if the father is absent.
4. Proponents argue that being a poor, single mother on welfare is not a life that someone
risen.
5. The Earned Income Tax Credit works like a negative income tax for the working poor.
C. Negative Income Tax
1. Definition of negative income tax: a tax system that collects revenue from high-
2. The only qualification required to receive assistance would be a low income.
b. A negative income tax would subsidize not only the unfortunate but also those who are
simply lazy.
3. The Earned Income Tax Credit (EITC) works much like a negative income tax, but it applies
only to the working poor.
D. In-Kind Transfers
2. Advocates of in-kind transfers argue that these make sure that the poor receive what they
need most.
3. Advocates of cash payments argue that the government cannot know what goods and
services the poor need the most.
Chapter 20/Income Distribution and Poverty ❖ 359
E. Anti-Poverty Programs and Work Incentives
1. Many policies for the poor have the unintended effect of discouraging work.
b. Children will not get to see their parents with a full-time job and this may impair their
own ability to find and hold a job when they get older.
a. As a family's income rises, it becomes ineligible for these programs.
very high.
3. One possible solution would be to gradually phase out the benefits gradually as the family's
4. In 1996, the government passed a welfare-reform law that limits the amount of time that any
person can collect welfare.
E.
In the News: International Differences in Income Redistribution
1. Many countries have more generous government programs to support the poor, but they
also have very different tax systems.
2. This article from
The New York Times
states that while the tax system in the United States is
already one of the most progressive in the developed world; it does not raise enough money
to result in more equal distribution of income.
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
Three potential problems in interpreting the measured poverty rate are: (1) in-kind transfers
are not accounted for in the poverty rate, so the poverty rate overstates the amount of
poverty; (2) the poverty rate is based on annual income, but income over the life cycle is
much more equally distributed than annual income; and (3) the poverty rate is affected by
income.
2. Based on the assumption of diminishing marginal utility of income, a utilitarian would favor
some redistribution of income from Pam to Pauline because it would increase the total utility
of society. A liberal would want to maximize the utility of the least well-off person in society,
360 ❖ Chapter 20/Income Distribution and Poverty
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
so a liberal would favor even greater redistribution. A libertarian would not want to
redistribute income from Pam to Pauline as long as the process of earning income was a fair
one.
3. Policies aimed at helping the poor include minimum-wage laws, welfare, a negative income
tax, and in-kind transfers. Minimum-wage laws can help the working poor without any cost
to the government but have the disadvantage of causing unemployment among some
Questions for Review
poorest fifth.
2. Over the past forty years, the income share of the richest fifth of the U.S. population has
increased from 40.9 to 48.9 percent.
4. Because people may have temporarily high or low income and because income varies over
the life cycle (people's incomes are lower when young and higher when older), annual
income does not represent true inequality in living standards.
5. A utilitarian would like everyone to have equal incomes, but would recognize that
equalizing incomes at all as long as the process of getting income is fair.
6. In-kind transfers are beneficial because they ensure that the poor get what they need most.
best position to know what they need.
7. Antipoverty programs can discourage the poor from working because they effectively tax
away earnings by significantly reducing benefits when a person earns income. This
disincentive could be reduced by reducing the benefits more gradually, but the program
would be much more expensive.
Chapter 20/Income Distribution and Poverty ❖ 361
Quick Check Multiple Choice
1. b
2. d
3. d
4. b
5. a
6. c
Problems and Applications
2. The percentage of children in families with income below the poverty line is almost twice the
percentage of the elderly in such families because the Social Security system supports the
elderly quite well, but the TANF (Temporary Assistance for Needy Families) program has
incentive effects that tend to keep families from working their way out of poverty.
b. To increase economic mobility across generations, the government might increase its
support for education.
c. The advantage of reducing spending on welfare to increase spending on programs that
who do not make it.
4. Community 1 has ten families with income of $100,000 each and ten families with income of
$20,000 each. Community 2 has ten families with income of $200,000 each and ten families
with income of $22,000 each.
b. Rawls would prefer the distribution of income in Community 2, since the worst-off family
has more income than in Community 1.
c. Most people will prefer the income distribution of Community 2, since both rich and poor
greater.
d. A utilitarian may prefer the income distribution of Community 1 because income is more
equal across its citizens.
362 ❖ Chapter 20/Income Distribution and Poverty
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5. a. Leaks in the bucket are caused by the administrative costs of redistributing income,
people who lie about their income to cheat the system, and the fact that labor supply is
elastic, so that redistributive taxes reduce labor supply.
b. Generally, Republicans believe the redistributive bucket is leakier than do Democrats. As
a result, they think the government should do less redistribution of income than do
Democrats.
b. Rawls would prefer the second distribution since the worst-off person is better off than in
the first distribution.
c. Nozick would not find either more equitable. He would think the most equitable
7. a. If people received cash instead of Medicaid benefits, it is unlikely that they would spend
as much on health care. Instead, they would purchase other things they want or need.
b. This suggests that we probably should not value in-kind transfers at the price the
c. Since the poor would prefer other things to Medicaid, it might be better to give them
cash transfers instead.
8. a. Since the woman receives a smaller TANF benefit when she earns a dollar more, she will
be less likely to work. Thus, the labor supply of low-income women will be lower as a
result of the TANF program.
income workers.
c. TANF provides a safety net for those who are less likely to be successful in the labor
market.
