6 - Optimal Design Of Transfers Flashcards
what is the difference between intensive and extensive margin responses
intensive = individuals choose how many hours they want to work
extensive = choose whether they want to work or not
what does the US do
- rewards low income workers
- negative MTR = negative phase out = rewards work
- small lumpsum grant = doesnt really benefit non-workers
what is the optimal transfer at bottom if individuals respond to taxes only through intensive margin
- lumpsum grant = -T(0) > 0
- high MTR = phases out quickly
what is the highest phase out rate possible
- a horizontal line = each additional £ of income reduces £ of transfer
the shallower the slope means …
the higher the phase out rate
- high T’(z) = high MTR
- lower slope = 1-T’(z)
why are high MTR at the bottom efficient
- they target the needy - people that need it the most
- we know that for below z* higher MTR can disentivise working - but since earnings are low at the bottom to start with it wont generate a huge loss
under what conditions will the gov provide higher transfers for low income workers
- when non-workers are seen as less deserving than average workers
- low lumpsum grant
- negative MTR = the government will provide a subsidy - pay higher transfers for low income workers than 0 hours
when do we give high transfers to non-workers
when there is a high lumpsum grant
- high -T(0)
if the gov increase the transfer rate what will happen to the slope
- higher transfer = higher phase out rate
what are the 3 effects of a government reform on transfers
- mechanical fiscal cost = dM
- welfare effect = dW
- fiscal cost = dB
what is the mechanical cost?
the cost to the government assuming that the individuals dont change their behaviour
what is the optimal bottom rate tax formula
- how does dm,dw,db play into this
at the optimal when dM + dB + dW = 0
t1 = g0 - 1 / g0 - 1 + eo
according to the formula what is the distribution preference when g0 > 1
- big lumpsum grant -T(0)
- if the transfer is high then tax rate must be high to expense this
- high phase out rate
- high t1
- shallow slope
what does g0 > 1 mean
- g0 = the social welfare weight of 0 earners
= we care about 0 earners welfares greater than average
according to the formula what is the distribution preference when g0 < 1
- society sees nonworkers as freeloads and nondeserving
- EITC
- negative tax rate
- intercept is close to 0 (no lumpsum grant)
- incentivise non-workers to work
- slope greater than 45’
under what conditions are in work subsidies optimal
- labour supply responses are concentrated along the extensive margin
- the gov cares about low income workers = g1>1
what is the assumption of the extensive responses model
that behavioural responses only take place through the extensive margin
so earnings dont respond to MTRs
what is the objective of gov subsidies
to incentivise people to work more than the decrease in tax rate will make them want to reduce their hours
- as long as intensive marginal responses are small - people dont switch from z2 to z1
- we want to switch to be from z0 to z1
why is the extensive reform increase dc1 a win win
- dM + dW is positive
- social welfare gain is greater than the fiscal cost
= positive redistribution effect - there is a tax revenue gain - induces non-workers to start working
what is g1
what is g1 > 1
the social welfare weight on low-income workers with earnings z1
£1 distributed to low paid workers is valued more than £1 distributed to all
when is the optimal bottom rate formula satisfied
when g1>1
and what is the equation
dM + dB + dW = 0
t1 = 1-g1 / 1-g1+e1
why is it better to have a larger transfer to only z1 than to those with 0 income
- 0 income will distrot z2 incentives
- we dont want higher types to move down
- grants = distort behaviour of all people on extensive margin
summary
what is graph if
g1 > 1
low income workers more deserving than average
EITC
* negative t1
* subsidy
* low phase out rate at the bottom is optimal
* only if labour responses are concentrated along the extensive margin - z2 wont change behaviour
summary
what is graph if
g0 > 1
non-workers more deserving than average
- high grant
- high MTR
- shallow slope - high phase out rate at bottom
- no strong response along the extensive margin (dont want people to quit work)
summary
what is graph if
g0 < 1
non-workers are less deserving than average = freeloaders
- low grant
- low phase out rate at the bottom
- low tax rate
what is better
- means tested transfer programs (out of work)
- in work benefits (EITC)
in work benefits
- redistribute to low income workers
- improve incentives to work
means tested
- incentivize people it is not aimed at: to not work
- high phase out rates
what are other kinds of transfers that are better than means tested cash transfers
- what are better options than giving low incomers cash
- tagging
- in-kind programs
what are the 3 criteria needed for tagging to be successful
- observable characteristics to the gov
- this characteristic is negatively correlated with earnings capacity = makes sure its redistributed to those that need it from high to low ability
- immutable = no moral hazard because - no incentive to change characteristics
what is tagging
targeting benefits to observable individual characteristics
- groups of people that are given special tax schedules
- disabled, single mum, gender
what are in kind transfers
transfer of goods or services rather than cash facilitated by a government to its poorer citizens
what is the rational individual perspective of in-kind transfers
if an in-kind transfer is not tradeable then it is inferior to cash transfers = individuals are worse off because they cant sell
if it is tradeable at market price then equivalent
- rational perspective = cash transfer is preferred
- why do societies do in-kind redistribution
(4 and reasons)
- commodity egalitarianism
- some goods should be provided to all - human rights (education, health care) - paternalism
- society imposes its preferences - behavioural
- government can make better decisions on behalf of them (self control) - efficiency
- could be efficient if in-kind can prevent those who dont really need the transfer from getting them
what are the social perspective justifications as to why in-kind transfers are made instead of cash (preferred)
just list the 4
- commodity egalitarianism
- paternalism
3.behavioural - efficiency
what does the Barr 2022 paper test
what are the long run effects of cash transfers for children in low-income families
- does the additional tax deduction for december born first children over january have a LR effect to the childrens earnings when they are in their 30s
- december get an extra year of benefits
what does the Barr 2022 paper do
- they track the impact of the tax refunds in the first year of newborns life - families get more EITC funds for newborns
- does this extra refund = mean that firstborns do better off
- uses IRS tax return data and educational data
- uses regression discontinuity design at the dec/jan eligibility cutoff to compare first born children in their 30s
what does the Barr 2022 paper
find
- December born kids get on average 1300 more than jan
- transfer in infancy increases young adult earnings
- december born adults earn 1-2% more than jan
- december born perform better on maths/reading tests and more likely to graduate
- large LR effects on earnings means that the transfer pays for itself by creating larger increases in income - and then tax revenue
what are the key takeaways from barr 2022
- extra money in early stage life has large long lasting effects
- increasing transfers = beneficial
- and will pay for itself since the cost is smaller than future benefits
- has infinite return
